What is bankruptcy?
Bankruptcy is a federal court process that helps both
businesses and consumers eliminate their debts or repay them
under the protection of a bankruptcy court. In 2003,
approximately 1.66 million personal bankruptcies were filed,
an all-time high. Many of those who file owe as little as
$5,000. Harassing calls from collectors, financial pressures,
and so-called "non-profit" credit counseling companies are of
little help and represent some of the primary reasons for the
staggering number of bankruptcies.
If passed, recent bankruptcy law proposals will make filing
bankruptcy even more difficult. For the last 5 years, major
banks and credit card companies have been campaigning hard for
these changes, changes that will leave you with fewer
alternatives to getting out of debt.
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What are the different types
of bankruptcy?
Bankruptcy can be described as a "liquidation" or
"reorganization." Most consumers will file a
Chapter 7 or
Chapter 13.
"Liquidation" bankruptcy is called Chapter 7 and is the most
common filing. In a Chapter 7 bankruptcy, a consumer or
business asks the bankruptcy court to discharge all of the
debts they owe. Some debts cannot be discharged. (See
Non-dischargeable Debts question.) In exchange for the
discharge of debts, the business' assets or consumer's
nonexempt property are sold (or "liquidated"). The proceeds
are used to pay off the creditors. Individuals filing for
Chapter 7 usually have severe debt problems with large credit
card and other secured and unsecured debt. They typically do
not own a lot of assets, which can be liquidated and therefore
do not have as much to lose.
There are several types of "reorganization" bankruptcy:
Chapter 11, Chapter 12, and Chapter 13. Consumers with secured
debts under $871,550 and unsecured debts under $269,250 can
file for Chapter 13. The main difference between Chapter 13
and Chapter 7 is Chapter 13 enables a debtor to retain certain
assets that would otherwise be liquidated in Chapter 7. In
most cases, you can keep your home and car under either plan
(provided your equity does not exceed certain limits). Under
Chapter 7, however, you won't be able to keep rental
properties, antique collections, etc. which you can retain
under Chapter 13. A Chapter 12 is for family farmers.
Family farmers can file for Chapter 12. Consumers with debts
in excess of the Chapter 13 debt limits and businesses can
file Chapter 11 -- a time-consuming and expensive process. In
any reorganization bankruptcy, you file a plan with the
bankruptcy court proposing how you plan to repay your
creditors. Some debts must be repaid in full, some are
partially repaid, and others aren't paid at all. Some debts
must be paid with interest, some are paid at the beginning,
and some at the end.
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Why would I file Chapter 13
instead of Chapter 7?
A chapter 13 bankruptcy is normally for people with too much
income to file a chapter 7 or for those who have a lot of
non-dischargeable property. Chapter 13 bankruptcy is for
consumers or small businesses who want to repay their
creditors while protecting their real estate and personal
property and avoiding harassing collections efforts. You
cannot file a Chapter 7 if you have filed a 7 or 13 within the
past 6 years (unless you paid off at least 70% of your
unsecured debts in a previous 13 filing). However, you can
file for Chapter 13 at any time. A trustee would propose a 3-5
year plan to creditors where the debtor would repay part of
his debts out of future income. The trustee calculates how
much you can afford to pay each month after considering your
living expenses, income, and disposable income. At the end of
the plan's period, you would no longer be liable for your
debts.
In a Chapter 13 you end up paying back at least 50% of your
debts and in some cases, the entire amount. If a payment is
missed you could be forced to pay the whole debt back. A
Chapter 13 doesn't stay on your credit report as long as a
Chapter 7 and there are some debts that can be discharged in a
13 that can't be discharged in a 7. The main problem with
chapter 13 is that in some cases you could end up paying back
50% or more of the debt, in some states the entire amount of
the debt, and forced by the courts to make the payments. If
you then miss a payment you could end up in breach of court
and forced to pay the whole debt. You can stop the collection
efforts using chapter 13 but why would you want to tie
yourself into making payments by the courts?
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Who is eligible for a
bankruptcy?
In order to be eligible to file a Chapter 7 you must not have
been granted a Chapter 7 bankruptcy within the last 6 years or
have completed a Chapter 13. You also must not have had a
bankruptcy filing dismissed for cause within the last 6
months. If after paying all of your necessary monthly expenses
there is not enough money to pay your remaining monthly debts,
then Chapter 7 may be an option.
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How negatively will a
bankruptcy affect me?
Bankruptcy should be considered only as a last resort. Why?
Bankruptcy will stay on your credit report for 10 years.
However, it will actually remain on your court records for 20
years. In other instances, it will follow you for the rest of
your life. For example, if you apply for a loan, job,
insurance, or other items, you may very well be asked "have
you ever filed for bankruptcy?" This can negatively impact
your future employment and carries with it a negative stigma.
Credit companies also do not look favorably on people that
have used bankruptcy as a means of solving their debt problem.
The credit card offers you'll receive will carry with them a
"higher risk" interest rate than had you not filed. While
Bankruptcy may help you eliminate your debt, its negative
affects on your credit, emotions, court records, and
self-esteem may last much longer than 10 years.
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Will filing for bankruptcy
stop harassing phone calls from collectors?
When you file bankruptcy, something called an "automatic stay"
goes into effect. After you file, the court notifies all
creditors listed in your schedules. This stops virtually all
creditors from taking action to collect the debts you owe them
unless the bankruptcy court lifts the stay and lets the
creditor proceed with collections.
