A brief overview of the different types of bankruptcy and the downfalls to declaring bankruptcy. Also, we will look at some alternatives to bankruptcy and look to see what the future holds in store for bankruptcy.
Bankruptcy 101
At the end of 2004, 2,062,000 people filed bankruptcy. As you can see it is fairly easy to file bankruptcy. Declaring bankruptcy should always be considered as a last resort. Although bankruptcy seems to be an easy way out of a difficult situation, it does come with its consequences. Slowly over the past two decades the number of people who filed for bankruptcy has climbed. In 1980, for example, only 300,000 people filed for bankruptcy. It doubled in 1990 to 600,000.
Here are a few characteristics of an average consumer who declares bankruptcy:
The average age is 38.
44% of filers are couples
30% are women filing alone
26% are men filing alone
They are slightly better educated than the general population.
Two out of three have lost a job
Half have experienced a serious illness
Fewer than 9% have not suffered a job loss, medical event or divorce
There are two main types of bankruptcy. The first is Chapter 7 bankruptcy. Chapter 7 is the most common bankruptcy proceeding. This is a liquidation type of proceeding as opposed to Chapter 13’s reorganization proceeding. In this proceeding the debtor will only be allowed to keep exempt property. All of the debtor’s non-exempt property will be sold or liquidated to pay their debts. The unpaid amounts on dischargeable debts will be discharged. Let’s see how a proceeding would go.
First, the debtor files a bankruptcy petition in which he must list all assets as well as his/her outstanding debt. Assets fall into two categories: exempt and non-exempt. The exempt assets are those assets that the debtor is allowed to keep after the bankruptcy proceeding.
Some examples of exempt assets would be:
A certain amount of equity in that person’s home.
A certain amount of equity in that person’s car.
A small amount of clothing.
A small amount for other personal items.
The trustee who is appointed in the Chapter 7 proceedings will collect all of the debtor’s non-exempt assets and sell them. The proceeds will then be distributed to the creditors according to the priority of the debt.
There are also different types of debts. Some debts are non-dischargeable by the Chapter 7 proceedings. This means that even after declaring Chapter 7 bankruptcy, you will still have to pay off the debt. One example of this is student loan debt.
Another type of debt is secured debts. A secured debt is one in which the creditor retains an interest in some of the debtor’s property until the debt is paid. Secured debts have priority over non-secured debts. Non-secured debts are the last of the debts to be paid. These debts may end up being discharged altogether if there are not enough assets to pay them. Some examples of non-secured debt are credit cards and signature loans.
When Should You Consider Chapter 7
If there is no hope of repaying any of your debts.
If there are no cosigners involved.
If court action by creditors is imminent, filing stays all collection proceeding while in court.