As of December 2007, bankruptcy filings are up 28% from last year and are expected to increase in 2008 due to the combined factors of high household debt and rising mortgage costs. American Bankruptcy Institute
This is the article that no one hopes to need and we would prefer not to write. The word 'bankruptcy' is weighed down by such doomsday words as failure, defeat, impoverishment...well, you're getting the depressing idea. However, it is not 'the end of the world' to declare bankruptcy. Instead of running away from this topic, it is time to demystify bankruptcy with a little 'Bankruptcy 101.'
What is bankruptcy?
For most people, bankruptcy is a way to get a fresh start after acquiring too much debt. Most individuals who file for bankruptcy will file under Chapter 7 or Chapter 13. Depending on which is filed, one may get most of their debt erased or work out a workable solution with lenders to pay off existing debt.
Are bankruptcy laws determined by Federal or State government?
Bankruptcy laws are made by the Federal government. States can pass laws that protect the "lender and debtor relationship" but they cannot regulate how a bankruptcy is processed or if it is to be granted.
Can all debts be erased?
No. Whichever type of bankruptcy is filed, there are certain debts that cannot be erased at all. These include alimony, child support, most student loans and legal judgments against fraud or criminal negligence such as a drunk driving accident. Some taxes may be erased, but not all. In fact, taxes have their own set of bankruptcy rules.
Do I need a lawyer?
When filing for bankruptcy it is important to find a bankruptcy lawyer who can help you navigate the process. Bankruptcy lawyers specialize in this area of law and are familiar with the distinct differences and effects of the process; they can be your greatest ally in a tough, seemingly bureaucratic system.
How long will bankruptcy effect my credit?
Bankruptcy will stay on your credit report for 10 years. There are ways to improve your credit rating and make yourself more appealing to lenders. For more information on this, check out this useful website: www.lifeafterbankruptcy.com. It is not an easy road back and those filing for bankruptcy should have a realistic expectation to work hard at their future spending practices.
Do I have to do debt counseling?
Yes. Under the new bankruptcy act passed in October 2005, it is now required that all persons applying for bankruptcy meet with a government qualified debt counselor first. After one has successfully filed for bankruptcy, the debtor must again meet with a counselor before the bankruptcy file will be closed.
What is Chapter 7 bankruptcy? (In a nutshell)
Chapter 7 bankruptcy is also known as a "liquidation of debt." A person can file for Chapter 7 every 8 years. This usually involves the liquidation of property to pay back debts. An appointed trustee sells all secured, non-exempt property for the debtor and distributes money raised among the lenders. Unsecured debts, such as credit card bills and most medical bills can be erased. This may mean the loss of secure debts such as a home. However, most states do have protections for debtors in place to insure they may keep life necessities such as clothing and some furniture. Retirement funds such as IRA's are also protected and debtors may keep these as well. After the changes to bankruptcy law in October 2005, many debtors may not get approved for Chapter 7 and be required instead to apply for Chapter 13. In short, if you still have an income and make more than the median for a household of your size in your state you may have to file for Chapter 13. To find out if you should be filing for Chapter 7 or Chapter 13, you can use a mean calculator like the one at legalconsumer.com. Again, this is where consulting a lawyer becomes very important.
What is Chapter 13 bankruptcy? (In a nutshell)
Chapter 13 bankruptcy is also known as a "reorganization of debt" or the "wage earners' plan." One can file for Chapter 13 more often as long as any previous filings are already closed. This is the bankruptcy for those trying to a find a way to get out of debt but still expect to pay off some of their debt. Generally speaking, if you still have a source of income and could make payments, just not the high ones you have now, you can be restructured into a debt payment plan under Chapter 13. This is the most likely to be used to try to stop a mortgage foreclosure. In this scenario, you can keep the house, car and more than you could under Chapter 7. There are limits to the amount of debt that can be restructured. If one is above those limits they would file under Chapter 11, however, the average American Joe/Jane is not in this category.
More Resources
US Department of Justice - US Trustee Program
www.usdoj.gov/ust/
A complete listing of approved credit counseling agencies is available through links on this Web page. [Listed by state.] www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm
A complete listing of approved providers of financial management instructional courses is available through links on this Web page. [Listed by state.] www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm
American Bankruptcy Institute
www.abiworld.org
The American Bankruptcy Institute is the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
www.govtrack.us/congress/bill.xpd?bill=s109-256
Bankruptcy Action
www.bankruptcyaction.com
The objective of this website is to provide the person, thinking about filing bankruptcy, the information he or she needs to make an informed decision.
Lawyers Listings
www.lawyerslistings.com/about.shtm
Our mission is to present to the Internet community an easy-to-use site in which to search for law firms and individual lawyers.
Life After Bankruptcy
www.lifeafterbankruptcy.com
On this website you'll discover everything I did to recover so quickly...and many other bankruptcy recovery and credit repair strategies you'll find nowhere else.
NOLO Bankruptcy Library
www.nolo.com
Nolo is your legal companion, empowering you and saving you money whenever the law touches your work, life or finances.
US Courts - Bankruptcy Basics
www.uscourts.gov/bankruptcycourts/bankruptcybasics.html
Bankruptcy Basics provides basic information to debtors, creditors, court personnel, the media, and the general public on different aspects of the federal bankruptcy laws.
What can you do to prevent Bankruptcy?
- Continue to take care of essential bills first: mortgage/rent, taxes, child support, and utility bills.
- Eliminate frivolous expenditures. No more department store credit cards, cable TV, magazine and newspaper subscriptions, etc. Be honest about what you can live without with for a while.
- If you own your home, consider a home equity loan to get rid of high rate debts such as credit cards.
- Watch your credit report. Close unused accounts, check for errors and resolve any questions with lenders immediately.
- Know the warning signs: -Are you using credit cards to pay off bills or credit cards? -Are you borrowing against unprotected debt? i.e. Are you borrowing from a credit card to pay the mortgage? When you see you are bouncing debt around and not making any headway, it is a good time to look at credit counseling.
- Warning about credit counseling: If you choose to do debt consolidation recognize that it will effect your credit score. Also, make sure you understand how the payments will work and if you can really make the payment - sometimes they are set too high!
- Avoid aggressive lenders. If you begin to get offers for loans that sound too good to be true - they are! There has been a big push to penalize aggressive lenders who only help people acquire more debt. However, they are still out there and you should be a careful shopper of any loans you take.