Question

Bankruptcy laws have changed over time. Give a brief summary of some of the changes that have occurred and the bankruptcy chapters that are currently in place. Why do most people file bankruptcy? Is the Code ethical? What is the philosophy behind the Bankruptcy code?

Answer 1

What is the Bankruptcy Code? What is the Philosophy behind this code?

Bankruptcy Code is a set of federal laws. It was brought in place to govern all bankruptcy-related cases in the United States. The philosophy behind this law is mainly to help the genuine people in need. In simple words, it aims at helping the insolvent genuine debtors to do a fresh start by reordering their affairs or business and making peace with their creditors. It has a humane aspect that wants to relieve the insolvent debtors of the stress that has been created by pre-existing debts and start a new life.

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The Bankruptcy Chapters currently in place

The chapters currently present in the Bankruptcy Code are mentioned below. The current Bankruptcy Cose is also called Title 11 of the United States Code.

1) Chapter 1, 3, 5 - They talk about the general rules and procedures of bankruptcy. Specifically, Chapter 1 has general provisions, Chapter 3 talks about the administration of cases, and Chapter 5 talks in detail about creditors, debtors, estates.

2) Chapter 7, 9, 11, 12, 13, 15 - These chapters mostly describe the bankruptcy proceedings. These are the main chapters of the code. Chapter 7 talks about liquidation. It applies to both business and individuals. The assets of debtors are reduced to money and distributed among the creditors. Chapter 9, 11, 12, 13 talks about the reorganization. The individual or business creates a plan as to how the debt will be paid while they continue to operate. Chapter 15 talks about foreign companies that are in debt with the US.

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Changes that have occurred in Bankruptcy Code over time

To understand this, let us understand a bit of history. The first act related to Bankruptcy that came into being was in 1800. 3 years later it was repealed. Then a new act was formed in 1841. This was also revoked 3 years later. Then 1867 act came into being, it underwent amendments and it was also dissolved in 1878. Then Nelson Act came in 1898 and later Chandler Act of 1938. Later there were reforms to it and Bankruptcy Reform Act of 1978 came into existence. This is the present act and there have been multiple changes to it since 1978. Some of the major changes took place in 2005 and people call it "New Bankruptcy Law". It made it more difficult for people to file bankruptcy in order to stop the abuse of the Bankruptcy Code. Some of the changes in brief were, it restricted the number of debtors that could declare bankruptcy under Chapter 7. The means test was introduced to decide about the genuine defaulters. The time between filing multiple bankruptcies under Chapter 7 was extended. It was made 8 years as opposed to 6 years earlier. It also became mandatory for debtors to complete an instructional course of 18 months. Failing which the debtors will not be discharged. A lot of other changes to definitions, exemptions, and fees were made. in nutshell, changes were made to avoid the abuse of this code and encourage genuine cases.

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Why do most people file bankruptcy?

Most people file bankruptcy in below-mentioned major scenarios.

1) if someone incurs unexpected high medical bills.

2) There are an unforeseen loss of job or business reverses.

3) Because of careless spending and poor judgment as well people may go in financial debts and file bankruptcy.

4) You do not have available cash because of some major setback and you are putting your basic requirements on the credit card.

5) You have missed credit card payments and your interest rates are sky-rocketing, approximately more than 30%.

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Is the Bankruptcy Code Ethical?

In simple words, Ethics refers to playing just and fair-minded. There are many discussions on this topic when it comes to the bankruptcy code. But, according to me, if it is a genuine case, it is absolutely ok to file bankruptcy. Moreover, the main philosophy behind this code is humane in nature. It aims at relieving a genuine person from misery and financial pressure. So that he or she can start afresh and learn from the mistakes. According to one of the major underlying principles of ethics, it is believed that we are being ethical by applying a humane approach to any situation. So, the Bankruptcy Code also revolves around it and that's why according to me, I feel this code is Ethical.