The BANKRUPTCY OPTION

Bankruptcy is usually an option of last resort of people with overwhelming debt problems. When you file for bankruptcy, you are asking a bankruptcy judge to approve a plan that divides whatever assets you have among your creditors (the people and businesses you owe money).

You may also be asking the court to discharge or cancel your debts if you do not have enough money or property to pay the debt. In return for a very visible, long lasting black mark on your credit record, bankruptcy allows you to pay what you can to your creditors and walk away from your debts.

Its actually fairly simple.  Working with an attorney, you file for bankruptcy in federal court. The filing fees arent very expensive. Attorneys fees vary widely. You choose between two personal bankruptcy options, Chapter 7 and Chapter 13. The court reviews your finances and decides whether to allow you to file for bankruptcy, and which of the two bankruptcy options is right for you.

Chapter 7 Bankruptcy

known as straight bankruptcy or liquidation, is the more drastic step and historically has been the more common choice.  (Recent legislation has made it more difficult to gain a courts approval to file for Chapter 7 bankruptcy, and courts are steering more people to Chapter 13 bankruptcy. Heres a typical scenario of a Chapter 7 bankruptcy:

If the court grants your bankruptcy petition, a court trustee decides which of your assets you can keep. These are called exempt assets.

Different states have different rules about what you can keep in order to move on with your life. A federal code applies in all states, and you can choose whether to have your assets reviewed under the state or federal guidelines. Under the federal code, exempt assets generally include: 

§          A portion of the equity you have in your home, if you commit to keeping up with mortgage payments.

          Your car, truck, or motor vehicle, or a small amount of equity in your car if you commit to keeping up with loan payments

          Jewelry (usually up to a specified amount)

          Basic household furnishing and work related tools (exempt in most states)

This is by no means a complete list, just a sample to show some of the more commonly used exemptions. 

Other high value assets that do not qualify for exemptions are turned over to the court trustee, who may then sell these assets at a public auction and divide up the proceeds among your creditors.

You are still responsible for certain debts and obligations: student loans, overdue taxes, alimony, child support, and fraudulent loans.  These debts and obligations are still your to pay even after the bankruptcy is final.

Chapter 13 bankruptcy

a more limited form of bankruptcy also known as reorganization, allows you to keep all of your property while you repay your bills. It is similar in many ways to the process of working with a credit counseling service, only the court provides you with full legal protection from your creditors. You qualify for Chapter 13 bankruptcy by showing that you are employed and have enough income to pay reduced living expenses and repay your debts over time.

·          If your petition is accepted, you submit a detailed budget to the court.

          The court reviews your budget, revises it, and turns it into a monthly payment plan.

          You are ordered to make debt payments directly to the court, and the court pays your creditors.

          If you fall behind in your payments to the court, you will be found in contempt of court and your case dismissed. Youll no longer be protected from your creditors. If you have no other options, you might then file for Chapter 7 bankruptcy (under which your non-exempt assets are turned over to the court and sold, with the proceeds going to your creditors).

Bankruptcy is relatively easy. Over a million people file for personal bankruptcy every year. (In 2001, the number was over one and a half million.) For some people, its the sensible option. If a medical crisis kept you out of work or left you with extraordinarily high medical bills;

If an accident or disease has left you with a disability that reduces your ability to earn an income; or if a divorce has left you with high debts, child care responsibilities, and a reduced income, your debts may be beyond your ability to repay.

But a large and growing number of people who file for bankruptcy are doing it for the second time. For people whove arrived at bankruptcy as a result of careless spending and a casual reliance on credit, bankruptcy can be seen as a quick fix that will solve a chronic debt problem. Only you can do that. If debt spending is your problem, the only way to solve it is through a long-term commitment to debt reduction. Its your money behavior that needs to change.

Beyond the fact that it doesnt solve most peoples debt spending problems, bankruptcy brings with it some other penalties.

          For the next ten years, your bankruptcy will be reported as part of your credit record when you apply for a loan, rent an apartment, or apply for a job.

          Your bankruptcy will be reported as part of your credit record forever when you apply for a job that pays more than $20,000 a year or for a loan more than $50,000.

          When you look for a job, an employer may see your bankruptcy as a reflection on your character. It may be the deciding factor against you when you are compared to another candidate.

          When you look for an apartment, a landlord may see your bankruptcy as a warning that youll fall behind in your rent, and can use that information when deciding to rent to someone else.

          You will find it very difficult to re-establish credit, at least for the next few years. You might be able to get a credit card with a low spending limitbut with a requirement that you keep at least that much on deposit at the bank that issues the card.  You might be able to lease a car-if you are able to pay 50-70% of the total value of the lease up front.

          The Internal Revenue Service gets a report of the bankruptcy settlement and considers as income any debt from which you are released. You will owe income tax on that amount.

Bankruptcy has its place. For people who have gotten into financial difficulties that really are beyond their ability to resolve, it offers a way to make a fresh start on sound footing. But for manyperhaps mostof the people who now use it, bankruptcy simply extends money problems into a lifetime of juggling and worry.

The above information is only a guide of typical situations, and not intended to be legal advice.  There have been several recent major changes to bankruptcy laws. Please consult a qualified attorney who specializes in bankruptcy to best advise you in your individual situation.