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Bankruptcy
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:
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:
-
Keep the
automobile and the debt as long as you are current and continue keeps
your payments current.
-
"Redeem"
the automobile which means pay it off at its current "fair market value"
-
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.
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:
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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
-
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.
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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.
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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.
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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.
-
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:
-
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.
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:
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debt for
trust fund taxes;
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taxes
for which returns were never filed or filed late (within two years of
the petition date);
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taxes
for which the debtor made a fraudulent return or evaded taxes;
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domestic
support payments;
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Student
loans;
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Drunk
driving injuries;
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Criminal
restitution;
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Civil
restitutions or damages awarded for willful or malicious personal
actions causing personal injury or death.
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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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