Identification

• The word bankruptcy comes from the Italian "banca rotta", meaning broken bench. This originated from the early practice of breaking the trade bench of businessmen who could not pay their debts. Early bankruptcy laws in the United States were enacted as a temporary measure for citizens suffering during times of unforgiving economic conditions. This meant that when economic conditions improved, the laws would be repealed. Later, bankruptcy laws were put into place and have been amended several times throughout the years.
  
  

History

• The Bankruptcy Act of 1898 is the foundation for the modern bankruptcy laws. It offered protection to failing businesses from creditors. There have been many revisions of this act over the years, the first happening in 1933 and 1934 during the Great Depression. This provided for the reorganization of businesses in bankruptcy, and was superseded by the Chandler Act of 1938, which further detailed business reorganization solutions. The Bankruptcy Reform Act of 1978 created Chapter 11 Bankruptcy, which created a stronger reorganization model for businesses in bankruptcy.
  
  

Types

• Bill Clinton signed the Bankruptcy Act of 1994 into law. This is considered the most inclusive piece of legislation on bankruptcy since 1978. It contains detailed provisions for both business and personal bankruptcies. It offers faster hearings, incentive for consumers and businesses to use Chapter 13 bankruptcy (which would allow them to reschedule debts instead of eliminating them through Chapter 7), and creditors are given legislative back up for obtaining debts from the estates of debtors. Plus, the National Bankruptcy Commission was created in order to continually monitor and investigate bankruptcy laws and practices, re-evaluating as necessary.
  
  

Features

• In November of 1997, the National Bankruptcy Commission produced a report which offered an extensively detailed bankruptcy reform plan. These recommendations were reviewed and revised for several years before being put into place in 2005. The new law provides for the fact that many people who filed for Chapter 7 bankruptcy in the past had no assets to liquidate, meaning that the creditors may get nothing when a debtor files. This forces more people to file for Chapter 13, which requires the debtor to repay debts under a new schedule.
  
  

Effects

• The 2005 bankruptcy reform requires a court to determine whether a debtor may file bankruptcy. This is done with a two part test. First, the court uses a formula which provides certain allowances for basic needs, such as rent and food. This way, the court can determine if the debtor can pay a minimum of twenty five percent of his unsecured debt, which includes credit cards. Then, the court determines how your income compares to your state's median income. If your income is below the median AND you prove that you cannot afford to pay twenty five percent of your unsecured debt, you may be allowed to file Chapter 7 bankruptcy. However, under the new laws, the court may still require you to file Chapter 13 if it believes that you are attempting to abuse the bankruptcy laws to avoid paying your debt.