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How Corporate Bankruptcy Works


Recent Changes in Bankruptcy Laws
Donald Trump speaks during the Trump International Hotel Washington, D.C groundbreaking ceremony at Old Post Office. Despite declaring corporate bankruptcy four times, he's never declared personal bankruptcy, which allows him to keep his millions.
Donald Trump speaks during the Trump International Hotel Washington, D.C groundbreaking ceremony at Old Post Office. Despite declaring corporate bankruptcy four times, he's never declared personal bankruptcy, which allows him to keep his millions.
Kris Connor/Getty Images

If you've read this far, you may be slightly confused. So, our man The Donald gets to load up his gaudy luxury properties with all kinds of unreasonable and unnecessary debt, wait until that debt outweighs his business's assets and then skulk away through the bankruptcy process, leaving investors and creditors clutching their wallets as they go down with the ship? In a word: yes.

In 2005, lawmakers enacted sweeping changes to the U.S. bankruptcy code intended to discourage bankruptcy petitions and make it more difficult for folks to game the system. That reform, however, applies largely to personal bankruptcies. Companies still retain wide latitude in seeking legal protection from swarming debt [source: DeLaurell].

The laws were tweaked largely to address a growing wave of personal bankruptcies, including many fueled by crippling personal credit card debt. Among other changes, people who file for Chapter 7 bankruptcy now have to meet a so-called "means test" in order to be eligible. If the person's income is above the average level in his or her state and the person can make minimal payments to creditors, the debtor can't seek Chapter 7 protection. The new law also looks to combat serial filers and requires all individual filers to show that they've attempted to obtain credit counseling [source: DeLaurell].

For businesses, the changes were relatively minor and aimed at protecting creditors. They include extending the time period in which creditors can try to get back the stuff that they've already shipped to bankrupt customers, while limiting a trustee's ability to recoup money paid to a creditor in the weeks before a business files for bankruptcy. The idea is that this will give creditors an incentive to extend loans or other credit to businesses that are in danger of going under and potentially keep these companies out of bankruptcy court [source: DeLaurell].

Yes, Donald, there is a Santa Claus. His name is Uncle Sam.


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