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
• Highest bankruptcy rates: Tennessee, Utah, Georgia, Alabama

Chapter 7

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

1. If there is no hope of repaying any of your debts.
2. If there are no cosigners involved.
3. If court action by creditors is imminent, filing stays all collection proceeding while in court.

Chapter 13

Chapter 13 bankruptcy is known as a reorganization bankruptcy. This type of bankruptcy is used by 25% of the consumers. When consumers filed Chapter 13 bankruptcy they usually want to pay off their debts over a three-five year period. This type of bankruptcy appeals to those who have non-exempt property that they want to keep. The amount of repayment can range from as little as 10% to 100% depending on the debtors income and the amount owed.

To qualify for Chapter 13 an individual may not exceed $250,000 in unsecured debts and $750,000 in secured debts. The payments are made to the secured creditors first based on their interest and priority.

When Should You Consider Chapter 13

1. If you are behind on your mortgage and need to catch up or you owe the IRS.
2. If the assets you want to protect would be liquidated under a chapter 7 and your disposable income is to high to qualify for a chapter 7.
3. If you need relief from collection proceedings or if you wish keep your obligation to pay your creditors and need some breathing room.
4. If you wish to leave the option of filing a chapter 7 at some time in the future. If you are a farmer who does not qualify for chapter 12 and have debt unrelated to farming.
5. You filed chapter 7 sometime in the past 6 years. You have a co-signer. If you could pay your debts within 3-5 years.

Downfalls to Bankruptcy

As tempting as filing for bankruptcy sounds, it still has its downfalls. There are many negative consequences that you will face.

1. Your credit will be ruined for the next ten years.
2. It can also hinder your ability to get a job.
3. You will not be able to establish new credit.
4. You will be unable to get insurance.
5. It will be difficult to find someone who will rent to you.
6. You have to pay court, attorney and filing fees upfront.

Alternatives to Bankruptcy

There is no easy way out when it comes to clearing your debt but bankruptcy doesn’t have to be the answer. There are other means in which to clear your debt and start anew.

1. You can try to deal with the creditors yourself and come up with a payment plan.
2. You can try to budget your expenses and live a more frugal lifestyle.
3. Take on a second job.
4. Contact a debt consolidation or credit counseling service.

Changes Are Underway

In a few months there will be changes made to bankruptcy law that will make bankruptcy hard to obtain. There will be more emphasis on making payment plans with your creditors. This new bankruptcy law will take effect on October 17th 2005. The major intent of bankruptcy reform is to require people, who can afford to make some payments toward their debts, to make these payments, while still giving them the right to have the rest of their debt erased. These people will have to file Chapter 7.