How does bankruptcy work Chapter 13

Bankruptcy in the US - When Debt Rises

In US law, bankruptcies are not only possible for businesses and companies, but also for individuals. Americans are generally considered to be particularly risk-taking individuals. One of the framework conditions for this is likely to be the possibility of consumer bankruptcy, which makes it possible to go bankrupt in the event of failure and then start over (fresh start model).

In 2000 there were around 1.3 million business and personal bankruptcies in the USA (with around 280 million residents), while in Germany there were only about 40,000 bankruptcies (with 82 million residents). In relation to the number of inhabitants, there was a bankruptcy in the USA for every 215th inhabitant, in Germany every 2050th inhabitant!

    American law recognizes several forms of bankruptcy:
  • the liquidation (= Dissolution of the debtor's assets)

  • the reorganization of the debtor's assets for the purpose of restructuring.
    The Federal Bankruptcy Act (Bankruptcy Code) contains the following regulations in particular:
  • Chapter 7 - Liquidation: Complete dissolution of the debtor's assets in order to satisfy the creditors as best as possible from the bankruptcy estate. The processing is entrusted to a bankruptcy administrator appointed by the bankruptcy court. According to this provision, the majority of bankruptcies are resolved. Over-indebted private individuals only use their assets, but not their monthly disposable income, to discharge their debts, and they usually get their remaining debts within a few weeks. In 2000, approximately 859,000 indebted US citizens chose this procedure. After 6 years a procedure according to Chapter 7 can be carried out again.
  • Chapter 11 - Reorganization / Restructuring: The debtor retains control of his assets and operates the restructuring as an asset manager. He is entitled to submit a recovery plan within 120 days that includes the distribution of certain assets to the creditors. After the deadline, either party can submit such a recovery plan. For their part, the creditors form a supervisory body. According to this regulation, the insolvency of the Kmart group of companies is currently (as of March 2002) being processed.
  • Chapter 13 - Reorganization / Consumer Rehabilitation: In consumer bankruptcy for individuals, the debtor has to make payments to the creditors according to a plan approved by the bankruptcy court. After that, the court will cancel all remaining debts (discharge). In addition to the assets, private individuals also have to make their disposable income available to the creditors for at least 3 years. Only around a third of all plans are fulfilled by the debtor; around two thirds have to be modified or even given up as a result of changed living conditions.
  • Bankruptcy estate: In principle, the entire assets of the debtor fall into the bankruptcy estate, regardless of where they are in the world and regardless of whether they are protected rights or not. Due to regulations in federal laws, however, the residential building (homestead exemption) and the debtor's wages as well as pension, disability, pension and insurance benefits in certain value limits are excluded from the bankruptcy estate. In some states there are no limits on the amount even for residential houses, so that even million dollar properties are "bankruptcy-proof" (e.g. Florida, Texas).
  • Enforcement prohibition (automatic stay): By filing for bankruptcy (filling up bankruptcy proceeding) Debt recovery by the creditors is no longer permitted (automatic stay; Section 362 a Bankruptcy Code).
  • Precedence:
      The bankruptcy estate is divided among the creditors according to their rank:
    • secured creditors (secured creditors)

    • senior creditors (priority creditors; Distribution costs, liabilities arising after filing for bankruptcy, wage claims, tax debts, etc.)

    • unsecured creditors (unsecured creditors)

    • Fines, fines, shareholders

In the last few years the economic situation in the USA has developed negatively in particular. A ZEIT report provides information on the US national debt: What happens if the US goes bankrupt?