Bankruptcy is a legal maneuver that many individual execute to resolve debt and start over again financially. Overseen by federal courts who appoint trustees and receivers to handle individual cases, bankruptcy proceedings can often last six months to five years. To initiate personal bankruptcy, a person can submit forms to the bankruptcy court in their district and pay the required filing fees. While a stigma is often attached to bankruptcy, many individuals see declaring bankruptcy as a way to regain control and responsibility for their financial life.
Reasons abound for why thousands of families opt to file bankruptcy each year. The most common reason is that they are so overwhelmed by debt that they can no longer pay the majority of their bills; this may occur after a job termination, temporary layoff, reduction in work hours or some other life catastrophe that drains money . Another reason is that individuals tire of being harassed by creditors at home and on the job at all hours. Still, others see bankruptcy as a way to save their marriage once financial arguments begin to weigh on the union.
According to U.S. Federal Courts information, sometimes the stress of missing bill payments and potentially becoming destitute causes such physical and emotional stress that the legal intervention of bankruptcy is sought. There are other alternatives, however. Many families in debt contact creditors on their own to negotiate a reduction in payments and a new payment schedule. Others take on extra jobs, find entrepreneurial income streams, borrow money from relatives, or leverage savings to get out of debt.
Many families faced with the lack of ability to pay their mortgages, utilities and credit card bills, however, do not believe these financial strategies are possible for them and see bankruptcy as a relief that will offer them protection. The widespread view of bankruptcy as protection stems from the fact that collectors are initially and immediately barred from trying to collect debt from anyone who files bankruptcy. All creditors must file claims with the bankruptcy court and wait for a trustee to decide which debts can be paid and in what order. Also, any court judgments, including attempts by banks to foreclose on a home must be stopped under what what’s known as an automatic stay provision in federal bankruptcy law. This gives some families a way to maintain their home as they attempt to financially recover.
The American Bankruptcy Institute advises that bankruptcy is only beneficial under certain circumstances. For instance, those whose total debt exceeds an amount they can pay off in five years might be good candidates for bankruptcy, particularly if most of their debts are the unsecured kind. Those without any savings and with few valuable assets might also benefit from bankruptcy. If collectors have begun garnishing wages, repossessing property, or taking steps for foreclosure, these might be signs that financial conditions are so extreme that bankruptcy is warranted.
Bankruptcy will halt garnishment and repossessions; sometimes, garnished funds are even returned by court orders related to bankruptcy. If utility companies are trying to shut off electricity, gas, or water due to non-payment, bankruptcy judges can also stop these actions. Not all debt is affected by bankruptcy filing; alterations to bankruptcy law in 2005 prevent past debts from being included in bankruptcy filings. Other exempt debts include alimony, government taxes and fees, and child support. Student loans are also exempt from bankruptcy filings and must be repaid although the bankruptcy court can arrange a new payback plan. Also, student loan collections can be temporarily stopped under bankruptcy orders.
There are four types of bankruptcy: Chapter 7, 11, 12, and 13. However, since Chapter 12 bankruptcy is primarily for farmers and Chapter 11 is for businesses, only two types of bankruptcy options exist for personal bankruptcy: Chapter 7 and Chapter 13. Most individuals file Chapter 7 bankruptcy, which calls for liquidation of assets. This means anything owned by the individual can be seized by the court-appointed bankruptcy trustee and be sold to payback creditors. Bankruptcy filers are not allowed to give away property to friends or relatives in hopes of protecting it from auction. Most courts will require full disclosure of property and may even approve a search to discover all property.
Chapter 7 bankruptcy is generally for those who do not anticipate any future income or sufficient future income. Under this type of bankruptcy, some debts are completely canceled or discharged. Chapter 13 bankruptcy generally does not involve the discharging of debt and is for people with earning potential who are simply going through transient financial hardship. It involves the creation of a financial resolution plan that will pay back creditors based on future earnings. Under the Chapter 13 option, most payment plans are calibrated to resolve all debts in five years or less.
The primary advantage of filing for bankruptcy is the cancellation of debt that has not be formally secured by property; unsecured debt is the most common kind of debt. Secured debt that cannot be discharged by bankruptcy includes mortgages, car loans, and debts linked to liens that have been imposed on property. Still, in many states, courts will protect homesteads and automobiles from seizure and auction, which is a benefit to many families. As stated earlier, other advantages of bankruptcy include stopping garnishment, collections, and financial judgments.
An additional advantage of bankruptcy is renegotiation of payback options for debts that cannot be discharged. Some creditors might not be willing to negotiate lower payments, reduced principal or lower interest rates until a bankruptcy receiver or trustee acts as a mediator. Through bankruptcy, many debts can be reduced to less than half of the amount owed. If the amount owed for any liens is more than the real value of the property used as collateral, those bills can be greatly reduced or even dismissed.
The ability to retain or reinstate a driver’s license is a little known benefit of bankruptcy. This helps individuals who have lost their license because of an inability to pay debts, such as those related to car crashes. The reinstatement feature can also be beneficial for those in states that suspend driver’s licenses for those who do not pay child support. The ability to drive is a major help for bankruptcy filers who are job hunting. One last advantage of bankruptcy is that it can protect your job if employers are becoming irritated and threatening to fire you over too many garnishments or creditor harassment.
Although it can help relieve most debts, filing for bankruptcy should not be seen as an easy way to escape the debt one owes. There are severe consequences and courts require commitments from you both financially and educationally. In terms of education, those who file for bankruptcy are required to seek counseling so they can understand their spending patterns and debt management motivations. In addition, filers must enroll in debt management classes that purport to teach new financial habits. Notice of bankruptcy filings are published publically, which many consider a source of shame.
Other disadvantages of bankruptcy include the devastating loss of personal items. Many filers of bankruptcy lose most of their property, except for the small percentage of property that is protected by the courts. Many personal goods are put up for auction in order to raise money to pay creditors who have filed claims during bankruptcy. When the money runs out, the bankruptcy court many still force you to set up a payment plan for some creditors.
Other disadvantages include suffering a blow to your credit profile and reputation. Your name will be attached to a bankruptcy filing for at least a decade and will draw interest anytime someone pulls your creditor report to hire you or consider a loan. Bankruptcy fees are also considered a disadvantage; it costs roughly $300 to file the petition in court. This is in addition to any lawyer fees.
Recovering from bankruptcy is possible, especially if you adopt new financial behaviors taught through the court-imposed counseling. While the filing of bankruptcy will remain on your credit reports for a standard 10 years, there are conflicting theories about how badly a person’s financial future and credit rating are really affected by bankruptcy. Because many lenders know bankruptcy filers have undergone credit counseling and management education, they are willing to take the risk of helping you reestablish credit. Bankruptcy filers may not get low interest rates on credit cards, however. Many credit card companies and other lenders prey on individuals with bankruptcy history by requiring collateral and high interest rates.
Bankruptcy law, however, prevents government agencies and many private organizations from discriminating against you because you’ve had a bankruptcy. This means your ability to rent homes and even get loans for college is protected. It is also still possible for those with a bankruptcy record to qualify for student loans as long as they are not in default on any current loans for college. New student loans, however, many require the signing of a Master Promissory Note.
Eventually, ten years will pass and you can request that credit-reporting agencies remove the bankruptcy from your record. If you have paid your bills on time in the interim and have not created high debt amounts, you will likely possess a very strong credit score. Credit reporting agencies look at a variety of behaviors in determining a credit score and bankruptcy history is always the dominant factor. Many people recovering from bankruptcy choose to live a cash-only lifestyle in order to avoid their past debt mistakes.
If after studying the consequences and effects of bankruptcy, you feel bankruptcy is an appropriate action for you to take, the next step is acquiring a bankruptcy attorney. While it is possible for an individual to file for bankruptcy and represent themselves, according to the U.S. Courts, most people lack full knowledge of the intricacies of bankruptcy law. Many free legal options exist through law firms that dedicate several hours of pro bono services each year.