Chapter 21 – Bankruptcy Law: In Theory, in History, and in Practice
H. Exceptions to Discharge
1. Once the trustee completes the required steps, with some exceptions, debts are
discharged even if there was not enough money to pay them.
2. Certain debts arising from misconduct of the debtor, such as debts arising because of
the debtor’s fraudulent behavior, cannot be discharged.
3. Certain debts that the debtor owes the government and several types of court-enforced
debt, such as alimony and child support, cannot be discharged.
4. Debts that were not discharged under a previous bankruptcy cannot be discharged.
5. Bankruptcy debtors may not discharge excessive expenditures occurring around the
time of the bankruptcy filing.
I. Restoring Credit Following Bankruptcy
1. A personal bankruptcy filing remains on a debtor’s credit report for 10 years and has
a detrimental effect on the ability to establish a line of credit.
2. In bankruptcy a good number of debts become discharged, which improves the
debtor’s debt-to-income ratio—a factor that potential creditors look at carefully.
3. Many debtors switch from credit cards to debit cards.
4. Some banks offer secured credit cards through which customers deposit money in the
bank to guarantee that their credit charges will be paid.
5. Credit card issuers sometimes allow debtors to continue using their credit cards if
they agree in writing, after the bankruptcy filing, to pay off the old debt.
6. People who are able to make a down payment and have steady income may be
eligible for a mortgage loan as soon as two years following a discharge in bankruptcy.
III. Reorganization – Chapter 11, Bankruptcy Code (21-3)
1. Chapter 11 of the Bankruptcy Code provides a method for businesses to reorganize
their financial affairs and still remain in business.
2. In a reorganization a qualified debtor creates a plan that alters the repayment
3. Chapter 11 filing is available to sole proprietors, partnerships, and corporations
(except for commodity brokers and stockbrokers) and may be either voluntary or
B. Special Features of Chapter 11
1. A debtor is referred to as a debtor in possession because the debtor keeps possession
and control of the assets, continues to run the firm, and performs most of the
functions that a trustee performs in other types of bankruptcy.
2. A trustee may be called in if there are problems.
3. When an order for relief is filed, an automatic stay goes into effect.
C. The Reorganization Plan
1. The debtor has the exclusive right to file a reorganization plan for 120 days, which
may be shortened or lengthened by the court.
2. When the exclusive period ends, creditors (and the trustee, if any) can file competing
3. A creditors’ committee is appointed to investigate the operation of the business and
assist the debtor in possession in developing and administering a reorganization plan.
4. A bankruptcy plan will group claims against the debtor into the following classes:
a. Secured creditors.
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