Bankruptcy -
The Last Resort
Bankruptcy. Just saying the word can bring a lump to your
throat and put a knot in your stomach. What is bankruptcy, and how do you know
if it's for you?
Are your debts overwhelming? Are you worried about how
you're going to pay all your bills this month? Are you considering filing
personal bankruptcy? Before you decide to take this irreversible step, make
sure you understand what bankruptcy is and how considering bankruptcy may
affect you.
U.S. Bankruptcy Law Basics
The purpose of bankruptcy is two-fold:
There are several steps involved with declaring bankruptcy.
First, you may want an attorney because legal paperwork must be filed in U.S.
Bankruptcy Court. The applicable laws include Title 11 of the U.S. Code and an amendment to it, S.256 —
the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005 (Bankruptcy Reform Act). It is not mandatory that you have an
attorney but having the assistance of an expert may be helpful.
Second, you need to be aware of the filing fees, which in
2006 were $299 for Chapter 7 and $274 for Chapter 13, in addition to attorney
fees (variable). If your income is less than 150% of poverty guidelines, you
can apply for a fee waiver in Chapter 7 filings. See the U.S. Courts information about bankruptcy fee waivers.
Third, you must determine the type of bankruptcy you can
file. There are two types of personal bankruptcy most often filed by a
consumer: Chapter 7, which erases most of your debts, and Chapter 13, which
creates a debt repayment plan. See the descriptions of Chapter 7 and Chapter
13 below. For a general introduction to bankruptcy law, see the U.S. Courts
publication
Bankruptcy Basics,
available as a downloadable
PDF file. See also the American
Bankruptcy Institute's
Overview of Bankruptcy and Frequently Asked
Questions.
President George W. Bush in April 2005 signed into law the
Bankruptcy Abuse Prevention and Consumer Protection Act, which makes it more
difficult to file the Chapter 7 form of bankruptcy. See the White House
website for
President Bush's remarks about this law.
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act
The Bankruptcy Abuse Prevention and Consumer Protection Act,
an amendment to U.S. bankruptcy laws, went into effect in October 2005. Also
known as the Bankruptcy Reform Act, it makes the following changes to
bankruptcy laws:
-
Credit counseling is required
before filing for bankruptcy; before the bankruptcy process is completed,
bankruptcy petitioners must also complete a debtor education class.
-
Those who wish to file Chapter
7 bankruptcy must pass a means test, thus steering more debtors to Chapter
13.
-
Bankruptcy filers must produce
more documentation, such as tax returns and proof of income, than previously
required.
-
Stricter and shorter time
limits are implemented. If a bankruptcy petitioner fails to supply the
required documentation within 45 days, the case is automatically dismissed.
If you filed for bankruptcy in the past year and it was dismissed, under
your current filing creditors are only stayed (barred from attempting to
collect) for 30 days after your petition is filed.
-
The time period between
discharges is lengthened: For Chapter 7, it is 8 years before you can file
for bankruptcy again; for Chapter 13, it is 2 to 4 years.
-
Under Chapter 13 filings,
certain debts are no longer dischargeable, including luxury goods,
educational loans, and debts to pension plans.
For more information about the 2005 Bankruptcy Reform Act,
see the U.S. Courts Bankruptcy
Resources webpage.
Filing a Chapter 7 Bankruptcy
If you have insufficient income to pay your debts and have
no prospect of creating additional income, Chapter 7 may help you. A Chapter 7
bankruptcy gives you a clean slate. This means that many of your unsecured
debts are discharged, and you don't have to repay them.
But the Bankruptcy Reform Act has made it more difficult to
file a Chapter 7 bankruptcy. First, you must attend a credit counseling
session from a government-approved credit counseling agency within 6 months
before filing your bankruptcy petition. Also, before your bankruptcy
proceedings are discharged, you must complete a debtor education course.
Those who wish to file Chapter 7 must pass a means test to
prove they lack the financial resources to pay back their debts. A debtor's
income for the past six months is compared with median income for the state
where the debtor resides. If the debtor's income is greater than the state
median, and the disposable income is sufficient to pay at least $10,000 over
the next five years, filing Chapter 7 is not an option. Instead, the debtor
can petition for Chapter 13 reorganization of debt.
If you file Chapter 7, you maintain responsibility for your
secured debt (such as a home mortgage or car loan) if it is considered exempt.
The laws determining what property is exempt vary according to your state of
residence, so check with your bankruptcy attorney. A court-appointed trustee
generally sells non-exempt property, such as real estate or personal property
of value, and the proceeds are used to pay your creditors.
You should keep in mind that not all unsecured debt is
dischargeable. For example, Chapter 7 does not eliminate:
You will continue to be responsible for these debts, even
after you file a Chapter 7 bankruptcy.
Filing a Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, also called the wage-earner plan,
gives you some breathing room with your unsecured debt. When you file Chapter
13, the courts appoint a trustee who is responsible for summarizing all of
your debts into a payment plan you can afford. The trustee allocates your
monthly income to your creditors. This type of bankruptcy relief is available
to you if you have:
In Chapter 13 your debts are not
discharged and you keep your property. Generally, the repayment schedule lasts
from three to five years. After completing the court-ordered repayment plan,
most remaining debt is discharged. One of the changes brought about by the
2005 bankruptcy reform legislation is that certain debts can no longer be
discharged:
-
Educational loans
-
Child support or alimony
-
Debts for luxury goods of $500
or more that were incurred within 3 months before filing for bankruptcy
-
Cash advances of $750 or more
obtained within 70 days of filing
-
Drunk driving damages;
personal injury lawsuit damages; fines related to criminal prosecution
-
Income tax debt arising from
fraudulently filed tax returns or from tax returns that were not filed or
filed late
- Trust fund tax debt
On the positive side, the 2005
bankruptcy reform allows loans from retirement plans or IRAs to be part of a
Chapter 13 reorganization, which means you can replenish your retirement
savings.
There are new limits on the
frequency of filing Chapter 13. You must wait two years between Chapter 13
filings, or four years if you have previously filed for Chapter 7 bankruptcy.
Consider The Impact of Bankruptcy
Financial relief can be a positive effect of bankruptcy;
however, you should weigh this relief carefully against the following:
-
Bankruptcy can stay on your
credit report for up to 10 years
-
You may have difficulty
re-establishing credit
-
You may have difficulty
renting or buying a home for several years
-
Your debts can only be
discharged once every six years under Chapter 7
- It may be more difficult for you to get some types of
jobs (particularly those dealing with money).
Keep in mind that credit assistance programs work similarly
to Chapter 13 bankruptcy but without the stigma usually associated when
considering bankruptcy.
The Final Decision
Making the decision to declare personal bankruptcy is not
one to be taken lightly and should be considered as a last resort. You may
have other options that will work for your situation — make sure you explore
them all.
This article,
"Bankruptcy - The Last Resort," is
courtesy of
Care-One Debt Consolidation and Counseling
