Why Do People File for Bankruptcy?

The decision by Rudolph W. Giuliani to file for bankruptcy may buy the former New York City mayor some time to deal with his debts — including the $148 million in damages he owes to two former Georgia election workers for spreading lies that they had tried to steal the 2020 election from former President Donald J. Trump.

However, it won’t necessarily make the jury’s award go away.

What does a personal bankruptcy filing do?

A personal bankruptcy, just like a corporate bankruptcy, usually puts a freeze on all pending litigation or attempts by creditors to collect on a debt. Given that, it is not too surprising that Mr. Giuliani filed for bankruptcy a day after a federal judge ordered him to begin making payments on the damages awarded to the former election workers. A filing can impair a person’s credit rating, making it hard for them to get a loan or buy property later.

What is the benefit of filing for bankruptcy?

Individuals file for bankruptcy when their debts exceed their assets and they see little hope of reversing that situation anytime soon. A bankruptcy filing is intended to provide breathing room for an individual to get their affairs in order and, usually, to develop a plan to pay creditors.

The ultimate goal of a bankruptcy is to give a debtor a “fresh start,” so that the individual is not weighed down by those liabilities forever. In the case of Mr. Giuliani, court papers broadly valued his assets at between $1 million and $10 million and his debts at nearly $153 million.

Who are creditors in a personal bankruptcy?

Creditors are people, institutions or businesses to whom the individual owes money. In a bankruptcy filing, claims by creditors are usually ranked in order of who gets paid first. So-called secured creditors, who potentially top that list, are businesses or people who have a claim against a debtor that involves property. In a personal bankruptcy, the most common secured creditor is a bank holding a mortgage on a property.

All other claims in a bankruptcy are considered to be unsecured, but some are deemed as having “priority” status when it comes to getting paid. Typically, any taxes owed by an individual are classified as priority creditor claims. Mr. Giuliani, in his filing, reported owing nearly $1 million in income taxes to the Internal Revenue Service and New York state.

Most debts owed by an individual will be listed as unsecured claims without priority status.

Mr. Giuliani did not list any secured claims. His filing listed a number of unsecured, non-priority debts including the $148 million jury award. He also listed debts of roughly $3 million owed to lawyers as non-priority unsecured claims.

What happens to a person’s debts in bankruptcy?

Most personal bankruptcies result in the formulation of a payment plan in which an individual will make payments to certain creditors at a reduced rate. Typically, creditors included in a payment plan will only get a portion of what they are owed.

Some debts in bankruptcy can be discharged — meaning the person is not obligated to make payments on them. These often include credit card debt, medical debt, and loans not secured by property.

A mortgage can be discharged in bankruptcy, but usually the individual will lose the title to his or her home. The same applies to a car loan. Child support, student loan payments, criminal penalties and income taxes usually cannot be discharged in bankruptcy.

Some civil judgments can be partially discharged. But a judgment involving an act of malice may not be discharged, and in Mr. Giuliani’s case, the jury award in favor of the former election workers may fall into that category.

Lindsey Simon, a corporate law and bankruptcy professor at the University of Georgia School of Law, said Mr. Giuliani probably won’t be able to discharge the jury award. But she said the bankruptcy filing could give him time “to cut some settlement.”