Bankruptcy

BANKRUPTCY IS A CONCEPT that often is directly tied to poverty. Persons are technically bankrupt when [Page 65]their debts exceed their assets and they lack the ability to pay for their debts. For the purposes of Title 11 of the U.S. Code, bankruptcy debtors can be individuals (including married couples), family farmers, corporations, and municipalities.

Generally speaking, a number of entities are not allowed to be debtors under the code, including banks, railroads, and insurance companies. The federal bankruptcy code actually includes a number of types of bankruptcy. Chapter 7 allows for total liquidation of individual assets to pay for debt. Chapter 9 pertains to bankruptcy by municipalities that are unable to pay their debts. Municipal bankruptcies are rare, but do occur.

For example in 1994, Orange County, California, was forced into bankruptcy after losing approximately $1.7 billion in the high-risk derivatives market, and was unable to meet its financial obligations. Chapter 11 pertains to bankruptcy of corporations. Some of the largest corporate bankruptcies have involved companies such as Enron Corporation and WorldCom, both of whose cases resulted in the loss of billions of dollars, forcing many employees, retirees, and investors into personal bankruptcy. Chapter 13 bankruptcy allows debtors to reorganize their debts in an effort to pay off at least part of the debts without forced liquidation of assets.

There is a multitude of reasons why individuals file for bankruptcy. One of the most common reasons is excessive medical debt. Approximately one-third of all Americans lack health insurance, and may be forced into bankruptcy when they are unable to pay for unexpected medical expenses. In that sense, expensive medical care has a negative impact on the poor, and may force those in the middle classes into poverty.

While many hospitals are willing to work with patients and their families, even not-for profit entities will take legal action against those persons who are perceived as unwilling to pay their medical debts. Faced with legal actions to collect medical bills, individuals may find themselves forced into filing for bankruptcy. Another common reason for bankruptcy filings is excessive nonmedical debt. Faced with social expectations for acquiring wealth, many individuals may choose to overextend their credit to purchase items such as cars, boats, and other consumer items that they cannot afford. Still others are forced into bankruptcy when they lose their job and cannot immediately find new employment.

In recent years, a number of corporate bankruptcies have been the result of criminal acts. For example, Enron was declared insolvent after it was determined that through a series of questionable transactions the value of earnings and stock had been illegally inflated to make the corporation appear to be profitable when it was not. WorldCom corporation bankrupted after it was found that it too engaged in illegal and unethical behaviors such that the value of the corporation was inflated far beyond its true worth.

On October 17, 2005, Title 11 was amended to make it harder for individuals and corporations to file for bankruptcy, particularly in terms of total liquidation of assets. In the past, many debtors chose to claim Chapter 7 bankruptcy. Under the new law, only individuals whose income is below the median and those high-income filers who pass a means test may qualify to file under Chapter 7. All others will have to file under Chapter 13.

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