Personal Bankruptcy

Bankruptcy is a legal procedure that consents a debtor, who is in a situation of financial distress, to get rid of his debts in the case in which this debtor distributes his non-exempt assets among the creditors. Personal bankruptcy law takes into consideration both individual debtors and small businesses. In the personal bankruptcy liquidation process, the non-exempt assets are distributed according to the Absolute Priority Rule (APR). Earning and wealth exemption optimal levels have been analyzed in this paper. It also focuses in determining the economic efficiency of the fresh start and the policy of 100 percent exemption during bankruptcy. This paper also discusses some important empirical research on personal bankruptcy.

1. INTRODUCTION

The debtors also benefit from in the case of higher exemption in that it raises their minimum consumption levels. The unfortunate thing about this exemption is that it affects the debtor’s ability to work and use their human capabilities after their bankruptcy state has been uplifted (White, 2005).

This paper consists of three sections (excluding introduction and conclusion). The first section briefly describes the personal bankruptcy law. The second section throws light on the personal bankruptcy theory. The third and last section discusses some empirical research on personal bankruptcy.

2. PERSONAL BANKRUPTCY LAW

In the United states, there are two major types of bankruptcy procedures - Chapter 7 for the case of “liquidation” and Chapter 13 for the case of “reorganization”. In this section, this paper examines Chapter 7 and Chapter 13 separately.

2.1 Chapter 7 –

The legal liquidation procedure of corporate and personal bankruptcy are almost equal. Under Chapter 7, when an individual debtor files for bankruptcy, the court immediately selects a trustee who gathers the non-exempt assets of the debtor, takes initiative to sell and distribute these among the creditors according to the Absolute Priority Rule (APR). Simply put, under Chapter 7, the debtors are required to surrender some part of their property (non-exempt) to wipe out all or a certain amount of their debts permanently. Chapter 7 excludes any kind of repayment plan.

The payment distribution process is defined by the Absolute Priority Rule (APR). Under APR, once the court built up the hierarchy of claimants, a senior claim can be completely satisfied and a junior claim can receive nothing. According to the absolute priority rule, some expenses such as - filing fees, trustee's fee and the fee of lawyers, which are known as administrative expenses, benefit the highest priority and the claims taking statutory priority are usually considered next. Afterwards, absolute priority rule takes into consideration unsecured creditors’