Encyclopedia of Sociology

BANKRUPTCY AND CREDIT

such as maximum limits on the amount of debt
owed. The debtor files with the court a plan for
repaying debts over a three-to-five year schedule.
The debtor must report all income to the court,
and must also include a budget that provides the
necessities of rent, food, clothing, medical treat-
ment, and so on. The difference between the
budgeted amount and the monthly income is the
disposable income, which becomes the amount of
the monthly payment.

The Chapter 13 petitioner must pay to a trus-
tee, who is appointed by the court, all disposable
income for the period of the plan. The debtor gets
to keep all property. The trustee disburses the
funds to the creditors. For a judge to confirm a
Chapter 13 plan, the unsecured creditors must
receive more money through the plan payments
than they would have received in a Chapter 7
liquidation. At the conclusion of the plan, any
remaining debt is discharged. Following this dis-
charge, the Chapter 13 petitioner is also barred
from further Chapter 7 bankruptcies for six years.

About two of every three Chapter 13 filers do
not complete the proposed plan. Although the
Chapter 13 may provide some benefits to the
debtor—for example, he might have time to reor-
ganize his finances—once plan payments are missed
the court may dismiss the Chapter 13 and the
debtor loses the protection of bankruptcy. Repay-
ment plans such as Chapter 13 were begun by
bankruptcy judges in northern Alabama before
Congress wrote them into law. Even today, Chap-
ter 13 is disproportionately popular in some judi-
cial districts in the South. About one-third of all
nonbusiness bankruptcies are filed in Chapter 13.

Some debts survive bankruptcy, regardless of
the chapter in which the bankruptcy is filed. Child
support, alimony, federally-backed educational
loans, and some kinds of taxes are among those
effectively nondischargeable in Chapter 7. Credi-
tors may also object to the discharge of a specific
debt if the debt arose from certain misbehavior,
including fraud and drunkenness. Creditors may
also object to the discharge generally on the grounds
of debtor misbehavior, including hiding assets,
disposing of assets before the bankruptcy, and
lying to the court. A judge may object to a debtor
filing in Chapter 7 if the judge believes that the
filing represents a ‘‘substantial abuse.’’ A Chapter
13 plan must be filed in ‘‘good faith.’’

For persons with substantial assets and for

businesses there is an additional choice, Chapter

11 , also called a reorganization. In Chapter 11, a

debtor business seeks the protection of the court

to reorganize itself in such a way that its creditors

can be repaid (although perhaps not one hundred

cents on the dollar). Creditors are given an oppor-

tunity to review the plan and to vote on its accepta-

bility. If a sufficient number of creditors agree, the

others may be forced to go along. In large cases, a

committee of creditors is often appointed for the

duration of the Chapter 11. Reorganizations may

provide a means to save jobs while a business

reorganizes.

In recent years, critics have charged that undo-

ing business obligations has become an important

motive for companies to reorganize under Chap-

ter 11. Various companies have been accused of

trying to avoid labor contracts, to avoid product

liability, or to insulate management from chal-

lenges. These strategic uses of bankruptcy are

potentially available to solvent companies. Although

strategic uses of bankruptcies by individuals prob-

ably occur, most studies have found that the indi-

viduals in bankruptcy are in poor financial condi-

tion, often with debts in excess of three years’ income.

There is also Chapter 12 bankruptcy, another

type of reorganization specifically for farmers. It

was introduced in 1986 and in most years between

one and two thousand cases are filed in Chapter 12.

Federal law permits the fact of a bankruptcy to

remain on a credit record for ten years, but the law

also prohibits discrimination against bankrupt debt-

ors by governments or private employers.

BANKRUPTCY TRENDS

The number of business bankruptcies remains

relatively small, usually fewer than 75,000 in a

year, with exceptions in a few years. The number

of nonbusiness bankruptcies, however, has gener-

ally risen for about two decades, from about 313,000

in 1981 to 811,000 in 1991. Nonbusiness bank-

ruptcies passed the millionmark in 1996, and by

1998 there were more than 1.4 million nonbusiness

bankruptcies in the United States.

Embedded within the general increase in bank-

ruptcy are substantial regional variations in filing