Bankruptcy

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Filing for bankruptcy has a very negative connotation in society, but it’s a way for people who have found themselves in serious financial trouble to ease the burden of what they’ve done and allow them to start over.  Businesses don’t like it, but for consumers, it can be a life saver.

Let’s start by exploring the different types of bankruptcies.  There are three different filings you can make:  Chapter 7, Chapter 11, and Chapter 13.

Chapter 7

Chapter 7 bankruptcy, sometimes call a straight bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors.

The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 will give that person a relatively quick "fresh start".

One of the main purposes of Bankruptcy Law is to give a person, who is hopelessly burdened with debt, a fresh start by wiping out his or her debts.

New legislation has been passed regarding Chapter 7 bankruptcies.  Laws can vary from state to state, so you will want to check with someone who knows or do extensive research as to what is allowed to be discharged with a Chapter 7 and what is not.

Essentially what the new laws ask of people who are filing a Chapter 7 bankruptcy is twofold.  First, they must take an approved credit counseling course within six months before filing.  They must also complete an approved financial management course before any debts can be discharged.

Even though those two new stipulations are in place, it is still relatively easy to file for a Chapter 7 bankruptcy.  There are, of course, governmental “hoops” you will have to jump through which is why it is often a good idea to secure the services of a bankruptcy lawyer.  However, it is possible for you to do this yourself as long as you do your research and “cross your T’s and dot your I’s”!

What are the most common reasons given for filing a Chapter 7 bankruptcy?  Well, of course, it’s the accumulation of excessive debt!  But seriously, here are the most common reasons why people get into such debt: 

• Medical bills

• Unemployment

• Divorce

• Overextended credit

• Large, unexpected expense

A Harvard Study reported that half of US bankruptcies were caused by medical bills. The study was published online in February of 2005 by Health Affairs. The Harvard study concluded that illness and medical bills caused half (50.4 percent) of the 1,458,000 personal bankruptcies in 2001. The study estimates that medical bankruptcies affect about 2 million Americans annually — counting debtors and their dependents, including about 700,000 children.

If you find that you have to file for a Chapter 7 bankruptcy, you may be worried about whether or not you’ll get to keep some of the things that are important to you and essential to life.  These things include a car and your home, among other things.

Unsecured debts, such as credit card debt, personal loans, money judgments and certain taxes are wiped out in a Chapter 7. However, certain debts are not dischargeable under Chapter 7 bankruptcy; these debts include, but are not limited to, most student loans, certain taxes, alimony and child or other court ordered support payments.

If a debt is secured by property, such as a home mortgage or an automobile loan, then you get to decide how to handle that debt. For example, in the case of a vehicle, you could: 

1. Keep the automobile and the debt as long as you are current and continue keeps your payments current.

2. "Redeem" the automobile which means pay it off at its current "fair market value"

3. Return the vehicle, include any balance due in your bankruptcy and pay nothing further on the vehicle. The choice is yours.

In 99% of the Chapter 7 cases, the person filing bankruptcy keeps all of their property. Bankruptcy law is not meant to punish you and allows you to keep your property under what are called "exemptions" or things you get to keep. You keep your car, your house, your jewelry, the boat, your clothing, everything! 

Of course, if you still owe a debt on anything like your car and your house, you should refer to the above scenario.  If you want to discharge your car loan, you’ll have to either pay up or give up the car.

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Chapter 13

Another option for bankruptcy for individuals is the Chapter 13.  This is more commonly known as a reorganization bankruptcy.  Chapter13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years.

This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

There are many reasons why people choose Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. Generally, you are probably a good candidate for Chapter 13 bankruptcy if you are in any of the following situations: 

1. You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. You may think filing Chapter 13 bankruptcy is simply the "Right Thing To Do" rather than file Chapter

2. You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.

3. You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future. This would be the case if for some reason you can't stop incurring new debt.

4. You are a family farmer who wants to pay off your debts, but you do not qualify for a Chapter 12 family farming bankruptcy because you have a large debt unrelated to farming.

5. You have valuable nonexempt property. When you file for Chapter 7 bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you'd have to give up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option.

6. You received a Chapter 7 discharge within the previous eight years. You cannot file for Chapter 7 again until the eight years are up.

A Chapter 13 can be filed if: 

• The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago

• The debtor received a discharge under Chapter 13 more than two years ago.

• You have a co-debtor on a personal debt. If you file for Chapter 7 bankruptcy, your creditor will go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments.

• You have a tax debt. If a large part of your debt consists of federal taxes, what happens to your tax debts may determine which type of bankruptcy is best for you.

As of October 17, 2005, new bankruptcy laws took effect for all three types of bankruptcy.  When it comes to Chapter 13, you cannot file this way unless the following conditions are met:

• The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago.

• The debtor received a discharge under Chapter 13 more than two years ago.

• When a motor vehicle was purchased within 910 days (2 1/2 years) of the filing and a secured creditor has a lien on it, the creditor retains the lien until payment of the entire debt has been made.

• The following debt is NOT discharged:

• debt for trust fund taxes;

• taxes for which returns were never filed or filed late (within two years of the petition date);

• taxes for which the debtor made a fraudulent return or evaded taxes;

• domestic support payments;

• Student loans;

• Drunk driving injuries;

• Criminal restitution;

• Civil restitutions or damages awarded for willful or malicious personal actions causing personal injury or death.

• All tax returns for the four years prior to filing Chapter 13 must be filed.

• Debtors must provide to the trustee, at least seven days prior to the 341 meeting, a copy of a tax return or transcript of a tax return, for the period for which the return was most recently due.

Chapter 11

A Chapter 11 bankruptcy is filed by businesses and is quite similar to a Chapter 13.  A Chapter 11 is available for individuals, but it is generally used by businesses to reorganize their debts and dealings so that they can be more financially solid.

When a troubled business is unable to service its debt or pay its creditors, they can file with a federal bankruptcy court for protection under either a Chapter 7 or a Chapter 11 bankruptcy. 

In a Chapter 7 bankruptcy, the business must cease operation and a trustee will sell all its assets and distribute the proceeds to the business’s creditors ratably in accordance with statutory priorities.

A Chapter 11 filing, on the other hand, is usually filed in an attempt to stay in business while a bankruptcy court supervises the reorganization of the company’s contractual and debt obligations.  The court can grant complete or partial relief from most of the company’s debts along with its contracts so that the company can make a fresh start.

Often, if the company’s debts exceed its assets, then at the completion of the bankruptcy, the company’s owners or stockholders all end up with nothing.  All their rights and interests are terminated and the company’s creditors end up with ownership of the newly reorganized company in the hopes that it will eventually succeed financially as compensation for their losses.

So, in general, an individual bankruptcy will be under a Chapter 7 or Chapter 11.  It’s a big decision for you to make, but sometimes, it’s the only way you can “get out from under” and begin anew.

Before you resort to filing for a Chapter 7 or Chapter 11, consider the alternatives.  Creditors might be willing to settle their claim for a smaller cash payment, or they might be willing to stretch out the loan and reduce the size of the payments. This would allow you to pay off the debt by making smaller payments over a longer period of time. The creditor would eventually receive the full economic benefit of its bargain.

Occasionally, you may "buy time" by consolidating your debts; that is, by taking out a big loan to pay off all the smaller amounts of debts that you owe. The primary danger of this approach is that it is very easy to go out and use your credit cards to borrow even more.

In that case, you end up with an even larger total debt and no more income to meet the monthly payments. Indeed, if you have taken out a second mortgage on your home to obtain the consolidation loan, you might lose your home as well.

When there really is no other way out, you’ll need to file for a Chapter 7 personal bankruptcy.  Try looking at it in a positive light, however.

There are some advantages to filing for bankruptcy.  By far the most important advantage is that debtors may obtain a fresh financial start. Consumers who are eligible for Chapter 7 may be forgiven (discharged from) most unsecured debts.

A secured debt is one which the creditor is entitled to collect by seizing and selling certain assets of the debtor if payments are missed, such as a home mortgage or car loan. With those two major exceptions, most consumer debts are unsecured. You may be able to keep (that is, exempt) many of your assets, although state laws vary widely in defining which assets you may keep.

Collection efforts must stop as soon as you file for bankruptcy under Chapter 7 or Chapter 13. As soon as your petition is filed, there is by law an automatic stay, which prohibits most collection activity.

If a creditor continues to try to collect the debt, the creditor may be cited for contempt of court or ordered to pay damages. The stay applies even to the loan that you may have obtained to buy your car.

If you continue to make payments, it is unlikely that your creditor will do anything. However, if you miss payments your creditor will probably petition to have the stay lifted in order either to repossess the car or to renegotiate the loan.

You cannot be fired from your job solely because you filed for bankruptcy.

Of course, there are disadvantages to filing for bankruptcy.  Since your bankruptcy filing will remain on your credit record for up to ten years, it may affect your future finances. A bankruptcy is a troublesome item in your credit record, but often debtors who file already have a troublesome history.

In one respect, bankruptcy may improve your credit records. Because Chapter 7 provides for a discharge of debts no more than once every eight years, lenders know that a credit applicant who has just emerged from Chapter 7 cannot soon repeat the process.

Research in this area has produced mixed results. A study by the Credit Research Center at Purdue University found that about one-third of consumers who filed for bankruptcy had obtained lines of credit within three years of filing; one-half had obtained them within five years.

However, the new credit itself may reflect the record of bankruptcy. For example, if you might have been eligible for a bank card with a 14 percent rate before bankruptcy, the best card that you can get after bankruptcy might carry a rate of 20 percent—or you might have to rely on a card secured by a deposit that you make with the credit card issuer.

There are a couple of ways you can go about filing for bankruptcy.  The most reliable is to secure a bankruptcy attorney and have them do it for you.  They are experts in this area and will often take care of everything for you including appearing in court on your behalf. 

They do charge a fee for this service, however.  That fee can range anywhere from $500 to $2,000 depending on your area.  Yes, it is odd that they’ll charge that high a fee to file a bankruptcy for someone who doesn’t have money in the first place, but many will accept payments.

You can also file the bankruptcy yourself.  There are many places on the Internet where you can download the forms you will need.  Be advised that they are often lengthy and in-depth, but they are fairly straight-forward when you take the time to fill them out completely.

Once you have the forms all filled out, take them to your local courthouse and pay the filing fee which is usually around $100 to $200.  You will receive a notice of a court date at which time you will need to show up and the judge will grant your request for bankruptcy. 

The bad part about filing yourself is that you have to contact all your creditors yourself to let them know that the bankruptcy has been filed.  You have to be very careful to list each and every one of your debts so they will apply under the discharge order.  If you miss even one, you will have to pay it after the bankruptcy is granted.

Filing for bankruptcy might not be your only option.  One of the newest trends in achieving financial freedom and a good credit score is to secure the services of a credit counseling or debt consolidation company.  But do they work?

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