Finance Globe

U.S. financial and economic topics from several finance writers.
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Bankruptcy Basics

Bankruptcy is a federal court process designed to help consumers repay their debts under the protection of the bankruptcy court, or possibly eliminate the debts altogether, depending on which type of bankruptcy is filed for.

The court-ordered protection given by bankruptcy can give you a chance to start over financially. The calls from your creditors will stop - they are prohibited from attempting to collect debts once you file for bankruptcy.

Filing for bankruptcy should only be used as a last resort, but it may provide you with the fresh start you need to help you manage your finances the next time around.

Bankruptcy and new credit
You must consider that there are serious consequences to filing bankruptcy. Bankruptcy will stay on your credit report for up to ten years, and it will also be listed as a public record. It will be difficult to get new credit, including car loans and mortgages.

When you are offered new credit after bankruptcy, you should be very cautious of the terms of the loan or credit card; people who have filed for bankruptcy are a prime target for predatory lenders, since these lenders know it not easy for you to get credit elsewhere.

You should be prepared to pay higher interest rates, even with ethical lenders, than someone who is considered a less risky borrower. Though most people don’t regularly check up on their friends and neighbors in the public records, be aware that it can happen, and truly anybody can find out about your bankruptcy if they wanted to.

Get legal help in filing for bankruptcy
It’s not required by law that you use an attorney to file for bankruptcy, but it is risky to represent yourself if your situation is at all complicated. If you do file without the help of a lawyer, be sure you are aware of all the recent changes made to bankruptcy laws in 2005.

A good lawyer who specializes in bankruptcy will know the new laws in your state, help you get the most benefit out of filing for bankruptcy, and make the whole process go smoother.

You might also see ads for low-cost, flat fee “bankruptcy clinics.” These firms usually require you to do the legwork, like getting your own credit reports and filling out your own paperwork. You may only see the actual attorney in the initial consultation and a time or two after, mostly dealing with paralegals throughout the bankruptcy process.

You might have a lot of questions that can’t be answered by the paralegals, they will “have to get back to you after consulting the attorney.” This can be an alternative if you need legal help but don’t have much money to spend on a lawyer, just be aware that you probably won’t get the personal service you might have expected.

Non-dischargeable debts

How the debts will be dealt with will depend on which type of bankruptcy is filed for, but there are some types of debts that ordinarily cannot be discharged. These debts include:
  • Back child support or alimony
  • Property settlement obligations from divorce or separation
  • Debts owed for personal injury or death due to criminal acts, including driving while intoxicated
  • Fines and penalties for violating the law, including court fees and restitution
  • Most tax debts, including income tax
  • Most student loans, unless it can be proved that paying them would cause undue hardship
  • Fraudulent debts – recently abusing credit for purchases and cash advances. For example, purchasing luxury items on credit because “I’m going to file bankruptcy anyway.”
  • Any debts you forgot to list in bankruptcy papers
Which Chapter bankruptcy?
The two types of bankruptcy for consumers are Chapter 7 and Chapter 13. The type of bankruptcy you file for will depend on your current income, how much property you own, and whether you can pay part of your debts. Chapter 7 bankruptcy process is usually over within about 6 months or so, while Chapter 13 is an ongoing process that takes three to five years to complete.

Chapter 7, also known as straight bankruptcy or liquidation, will require you to sell, or liquidate, much of your property to pay off your debts. You will be allowed to keep a certain amount of assets, possibly your home, an inexpensive car and certain personal effects up to a certain value. It is possible to keep a credit card if the account will not be included in the bankruptcy, and you are paying on that account as originally agreed.

In the eyes of creditors, this is the worse type of bankruptcy, because they don't see you as making much effort in the way of paying them. They see it as you throwing your hands in the air and saying, “I give up, let me out.” Chapter 7 bankruptcy will usually stay on your credit report for ten years.

Chapter 13 bankruptcy, also known as the wage-earner program or repayment plan, will allow you to keep much of your property and you will have to pay many of your debts. This process will require you to come up with a realistic repayment plan to pay off your debts within a reasonable amount of time, determined by the amount of your disposable income.

You will have to pay your priority debts in full; those are the debts that cannot be discharged, such as child support and alimony, taxes, and student loans. Your creditors will have to agree to the terms of your repayment plan; if they don’t agree, you will have to draw up another proposal.

It’s also very important that you make these payments as agreed, or you could lose the protection of bankruptcy; collection calls could start again and you could lose your home and car to foreclosure and repossession.

This type of bankruptcy is considered the more respectful bankruptcy in the eyes of creditors, because you are making a sincere effort to pay them as much as you can. Chapter 13 bankruptcy will usually stay on your credit for seven years.

Recent bankruptcy law changes
Changes to the bankruptcy law in 2005 now require all filers to undergo budget and credit counseling from a non-profit agency approved by the U.S Trustee in the bankruptcy system. The bankruptcy court clerk is required to maintain a publicly available list of approved agencies and instructional courses for bankruptcy filers.

Credit counseling may take place in person or by phone or internet, individually, or in a group. You will have to complete this credit counseling within 180 days prior to filing, and show your certificate of completion to the bankruptcy court. This counseling can provide eduation you can use for your lifetime, teaching you how to avoid financial disaster in the future.
Another recent change to the bankruptcy law makes it more difficult for filers with higher incomes, limiting whether they can have most of their debts discharged in Chapter 7, or if they will be required to pay back much of their debt in a Chapter 13 repayment plan.

The Chapter 7 filer will generally have to have an income equal to or less than the median income in their state for their household size. If the filer’s current monthly income is higher than the median, they will have to pass a “means test”.

To find out if you pass the means test, you would subtract certain allowable expenses and debts from your monthly income, and if you don’t have enough left over to pay your debts, you would be allowed to file for Chapter 7. Repayment in Chapter 13 would be required if you are deemed able to pay your debts after your allowable expenses.

The decision to file bankruptcy is hard for most families to come to terms with; it is the last resort, the one thing you never thought would happen to you. It’s not something that anybody plans for; life happens and you can’t always control everything. If you’ve gotten to this point, there’s no use in beating yourself up about it. Take this opportunity to start fresh and vow to keep control of your finances the next time around.

Source: The American Bar Association Guide to Credit and Bankruptcy
Random House Reference; 2006
Beware of Credit Repair Scams
Are You Considering Bankruptcy?


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Wednesday, 12 June 2024

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