Mr. James Crutcher is 20 years old and lives with his grandparents (who have taken care of him from the time that he was very young). He is close to them and sometimes helps to pay for their living expenses. James manages to save up some money and decides to purchase a truck. He has a seasonal job during the summer working as a foreman for a construction company and has about $3,000, which he intends to use as a down payment.
At the car lot, James impulsively purchases the first truck that he sees after he is told by the dealer that (1) he can afford it and (2) that the dealership will approve financing for him. Although James can make the truck's payments, he knows that he will have trouble paying for the insurance. He asks his grandparents if they can help him, and they agree to pay for the insurance. At this point, things begin to go wrong for James. Shortly after he purchases the truck, his grandparents' health begins to fail. They neither can afford to pay for the truck's insurance nor for their own medical needs. In addition to meeting his own financial obligations, James now must help his grandparents to pay for their medical expenses. Because he is paying for these expenses, he soon finds that he is unable to meet his own financial obligations, including paying for the truck and for its insurance. He files for Chapter 13 (wage-earner plan) bankruptcy in the hope that these proceedings will provide him with an opportunity to work out a payment plan to his creditors that will allow him to keep his property, including his truck, stereo, television, and so on.
Although James is attempting to work out a deal to satisfy his creditors, when the financiers at the dealership learn that he is behind on his car payments and has no insurance, they file a petition with the bankruptcy court to lift the automatic stay that attached to all of James' property at the commencement of these proceedings. Things are increasingly worse for James. Although one of his primary purposes for filing for bankruptcy is to save his truck, the bankruptcy judge rules in favor of the dealership. Because James has been unable to fulfill his contractual obligations to the financiers by making the car payments and insuring the vehicle, the judge lifts the automatic stay and allows the dealership to repossess the truck.
In addition, after the truck is repossessed, it is sold at auction to another dealership for wholesale (and not retail) value. This means that, in addition to losing the truck and the money that he already put into it, James still owes his financiers $2,000. How much of this he ultimately will have to pay will depend on the findings of the bankruptcy court. Without a mode of transportation to and from work, James loses his job. With no income to pay his creditors, he may now be forced to withdraw his petition for Chapter 13 bankruptcy (wage-earner plan) and file for Chapter 7 bankruptcy (liquidation) instead.
automatic stay--An injunction that automatically stops lawsuits, foreclosures, garnishments, and most collection activity against the debtor the moment a bankruptcy petition is filed.
Chapter 7--The chapter of the Bankruptcy Code providing for "liquidation," that is, the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors. In order to be eligible for Chapter 7, the debtor must satisfy a "means test." The court will evaluate the debtor's income and expenses to determine if the debtor may proceed under Chapter 7.
Chapter 13--The chapter of the Bankruptcy Code providing for adjustment of debts of individuals with regular income, often referred to as a wage-earner plan. Chapter 13 allows debtors to reorganize their finances, keep property, and use the disposable income to pay debts over time, usually three to five years.
- Truck Today, Gone Tomorrow: Discussion Questions
- Identify James' needs versus his wants in this scenario. Did he need to own this form of transportation? If so, did he need this particular truck? How could he have prevented a financial crisis?
- Identify some decision points at which James made his financial situation worse, or points at which he could have made it better.
- What safeguards should James have put into place to protect his finances--and avoid the risk of facing bankruptcy--while working on his job?
- What are some financial pitfalls/surprises that James should anticipate and prepare for at this stage in his life? How can James balance his own financial needs with his feelings of responsibility to his grandparents?
- Before considering bankruptcy, what are some other options available to James?
- What are the short-term and long-term consequences for James of filing for bankruptcy protection?
- Points to Look for in Student Responses to Discussion Questions
The scenarios and questions are meant to stimulate critical thinking and discussion about life decisions that bring people to bankruptcy court. This answer key begins to address the issues raised; however, it is by no means exhaustive. Students are encouraged to be as specific as possible in their analysis.
- Scenario 2: Truck Today, Gone Tomorrow Discussion
- The primary need that students are likely to identify is transportation to and from work. His wants center on the particular type of transportation that he desires, which is a subjective matter. Some students will say that James did not need to own this particular type of vehicle.
- James made his financial situation at risk when he purchased the new truck, especially one that stretched his finances so severely that he could not pay for the insurance. He could have (1) purchased a used car with part of his savings; (2) bought a less expensive car; and (3) gotten a ride to work or taken public transportation (if available) until he saved enough to buy a vehicle that he could afford.
- Some safeguards that James should have put into place to protect his finances and avoid the risk of facing bankruptcy include (1) establishing a budget within his means; (2) building up a cash reserve to cover living expenses; and (3) getting a job during the off season.
- Some financial pitfalls/surprises that James should anticipate and prepare for at this stage in his life include (1) the possibility that he could lose his job, and (2) the possibility that his grandparents' health may fail, which would change his financial responsibilities.
- Before considering bankruptcy, some other options that are available to James include (1) scaling down his standard of living, (2) contacting his creditors to see whether they would be willing to work out a payment plan with him directly, (3) shopping for a more competitive price on the car insurance, and (4) getting a job in the off-season.
- The most immediate short-term consequence of filing for bankruptcy protection includes the loss of his truck. Others may include the protection of his remaining assets from collection and the possible establishment of a more favorable credit card payment plan. Some long-term consequences may include damage to his credit rating for 10 years, difficulty getting credit, renting an apartment, or being hired by another employer.