Kenneth Carroll: Should My Mom Declare Bankruptcy?

Bankruptcy is a generalized term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors. If you can prove that you are entitled to it, the bankruptcy court will protect you during your bankruptcy proceeding. In general, bankruptcies can be categorized into two types – “liquidations” and “reorganizations.” Among the different types of bankruptcies, Chapter 7 and Chapter 13 proceedings are the most common for individuals and businesses. Chapter 7 bankruptcies normally fall in the liquidation category, meaning your property could be sold in order to pay back your debts. Conversely, Chapter 13 bankruptcies generally fall under the reorganization category, meaning that you will probably be able to keep your property, but you must submit and stick to a plan that will allow you to repay some or all of your debts within three to five years.

Chapter 7 Bankruptcy

Both individuals and businesses are allowed to file for Chapter 7 bankruptcy. These proceedings typically last between three and six months.
Liquidation of property: In a Chapter 7 bankruptcy proceeding, some of your property may be seized and sold to pay off some or all of your debts. However, as a benefit of this type of bankruptcy proceeding, any unsecured debts (debts that are not guaranteed by collateral) will be wiped out. In addition, there are certain types of property that cannot be sold in order to pay off your debts, such as the furniture in your home, you car and your clothes.

Secured debt: Secured debts are treated differently than unsecured debts in a Chapter 7 bankruptcy proceeding. In a Chapter 7 bankruptcy proceeding, you (the debtor) have to make a choice between allowing the creditor to repossess the property that secures the debt, continuing to make payments on your debt to the creditor, or paying the creditor a sum equal to the replacement value of the property that secures the debt. In addition, some types of secured debts can be wiped out during a Chapter 7 bankruptcy proceeding.

Chapter 7 Eligibility: Before you can file for Chapter 7 bankruptcy, you must be able to show that you are eligible to file for Chapter 7. To be eligible for Chapter 7, you cannot make enough money (minus certain expenses and monthly debt payments) to be able to fund a Chapter 13 bankruptcy repayment plan. There are other requirements to be eligible to file for Chapter 7 bankruptcy. Debts that will not be wiped out by Chapter 7 bankruptcy while credit card debt, unsecured loans, and other debts can be forgiven in Chapter 7, things like child support, taxes that are due, and alimony payments cannot be wiped out. For more debts that will remain after a Chapter 7 bankruptcy proceeding, see Debts that Remain after a Chapter 7 Discharge.

Chapter 13 Bankruptcy

Also known as the “wage earner” bankruptcy proceeding, only people with a reliable source of income are allowed to file for Chapter 13 bankruptcy.
Paying off your debt: In Chapter 13 bankruptcy in federal court, you must work with the court to come up with a repayment plan, and stick with the plan over the next three to five years. The amount you will need to pay is based upon your income, how much debt you owe, and how much the creditors of your unsecured loans would have received if you had filed under Chapter 7 instead of Chapter 13.

Limits on debt: In order to be eligible to file for Chapter 13 bankruptcy, you must be able to show that your debt is under the limits for filing. As of September, 2009, the limit on secured debt was $1,010,650 and the limit on unsecured debt was $336,900. If you have more than either of these amounts, you may not be able to file for Chapter 13 bankruptcy protection.
Repaying secured debts: Chapter 13 bankruptcy may allow you to repay secured debts, even if you are behind on payments, without having the property that secures the debt be repossessed. You may be able to put your past due payments into your debt repayment plan, and pay them off over a period of years.

Other forms of Reorganization Bankruptcy

There are two other types of reorganization bankruptcy in addition to Chapter 13. These are Chapter 11 and Chapter 12.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy proceedings are normally used by struggling businesses as a way to get their affairs in order and pay off their debts. In addition, some individuals also file for Chapter 11 bankruptcy when they are not eligible for Chapter 13 bankruptcy or own large amounts of non-exempt property (like several homes). However, Chapter 11 can be much more expensive and time consuming when compared to Chapter 13.

Chapter 12 Bankruptcy

Chapter 12 bankruptcy is very much like Chapter 13 bankruptcy, except that it is only available to people that have at least 80% of their debts arising from a family farm.

Who Can File For Bankruptcy?

Generally, anyone can, however, not everyone qualifies to file for a particular kind of bankruptcy. If you are an honest person who can’t afford to pay your bills, you can qualify for bankruptcy. If you have previously filed for bankruptcy, it may affect your options. For example, if you have recently filed a chapter 7 bankruptcy, you cannot file another chapter 7 for eight years. Bankruptcy is for the honest debtor with too much debt and no real way to repay it. So, you cannot file for bankruptcy to defraud your creditors. If you are in financial trouble, you cannot intentionally run up large debts with the intention of filing for bankruptcy afterwards. There are records requirements. You must gather personal tax returns, proof of your income in the six months before filing, and a certificate of your attendance at a mandatory credit counseling class.

As layoffs, pay cuts and foreclosures pile up; debt-burdened Americans are toying with bankruptcy both personally and for their businesses. The number of filings reached 1 million in the fiscal year ending Sept. 30, 2008, leaping more than 30% from the same period a year earlier, according to the administrative office of the U.S. Courts. Chances are those numbers would be even higher but for social stigmas dating to back to 16th century Europe, when deadbeats were publicly humiliated or thrown into debtor’s prison. Shame aside, the fact is that seeking bankruptcy protection may well be the right choice. As for having to forever wear a scarlet “B” on your chest, so by no means will you remain permanently persona non grata with lenders. The fact that you filed stays on your credit report for 10 years, but you can get credit again well within that time period. Your ability to do that depends on your pre-filing payment history, current income, debt-to-income ratio and how well you’ve paid your debts after the discharge. “If you can’t pay your bills and your debt is mounting, you’re already bankrupt,” If you’re in that situation, filing may be your way out.

How to File for Bankruptcy

The first part of filing for bankruptcy is determining whether it is the right call for you. It’s a huge undertaking, so ask yourself the important questions. How long will you likely have to repay these debts for? Are you legitimately unable to make the necessary payments? Can you compile the necessary information and documents? And are you prepared to deal with any fallout that comes with filing for bankruptcy? It can do significant damage to your credit score. Does your existing debt outweigh that consequence?

• Filers will also want to look into a bankruptcy lawyer. It’s possible to file for certain bankruptcy types without one, but at a time when you’re at your most vulnerable financially, finding someone who understands how to guide you through the various intricacies of filing.

• Before one can file for bankruptcy, United States Courts require you to take credit counseling, and after you file, it requires debtor education courses. Certificates of completion are required before debts are discharged.

• With credit counseling courses completed, the next step is to fill out the petition to file for bankruptcy. This and other bankruptcy forms are available on the U.S. Courts website. A bankruptcy attorney can help determine which other relevant forms will need to be filled out, based on what type of bankruptcy the filer is filing for, and how the specific local laws affect the case.

• If the petition gets accepted, the case is usually given to a trustee, a party not employed by the courts who can help oversee the case. The trustees will comb through documents to make sure all assets have been accurately collected and that no fraud has been committed. They will also set up a meeting with the creditors wherein the party who filed for bankruptcy must testify under oath.

Why Do People File for Bankruptcy?

The amount of debt the average American has continues to rise exponentially each year. There’s now over $1.5 trillion in outstanding student loan debt alone in the country. With such astronomical debt hanging over so many American households, people look to drastic measures. Emergency medical situations have put many Americans in tens of thousands, if not hundreds of thousands of dollars in medical debt. Medical debt and student loan debt can be a toxic combination for someone’s bank account, especially if they are also dealing with a loss of their job. A combo of these three is an extreme, but many feel bankruptcy is still the “extreme” option, a last resort. Filing for bankruptcy can wreck a person’s credit score and take years to recover; for someone to declare bankruptcy, taking the time to build their credit score back up would have to outweigh the difficulties of living under their existing financial struggles and debt.

What Factors Lead to Personal Bankruptcy Filings?

Because filing a bankruptcy case can be a huge decision with long-lasting consequences positive and negative people who are contemplating filing bankruptcy often want to know if their reasons for filing are typical, reasonable, or sound. A 2005 study reported that 46 percent of bankruptcies were related to medical debt. This conclusion has been borne out by other studies as well. This doesn’t mean that medical debt is the sole reason. There are lots of contributing factors and contributing debts. In addition to medical debt, leading factors that contribute to bankruptcy filings include unemployment and domestic issues like divorce. Note that most of these factors involve circumstances the filer could not control. According to this report, only 15% of filers report having to file because of actions they took and decisions they made that led to excessive credit card debt, large mortgages, or high car payments.

• The average filer is married, has a high school education, and makes less than $30,000 a year.
• In 2007, those younger than 25 made up less than 2 percent of filers. About 20 percent of filers are 55 years or older. The median age is about 45.
• Women are slightly more likely to file than men: 52.4 percent vs. 47.6 percent. Women make up 51% of the US population.
• People ages 65 and older make up about 8% of filers. Those ages 34 and younger make up about 19% of filers.
According to the Institute for Financial Literacy,
• 73% of filers have a job or are self-employed
• 27% make more than $30,000 a year
• 94% graduated from high school
• About 58% have at least some college
• 5% have a graduate college degree
• 30% are 34-44 years old
• 14% make $50,000 or more a year
Bankruptcy affects all age groups and all socioeconomic classes. In fact, it’s easy to argue that there is no one “average” or typical bankruptcy filer. But if we were to build one, she would likely be a middle-aged woman, married, Caucasian, with some college, who makes less than $30,000 per year. Even so, the statistics bear out that outside circumstances more so than age, income, or educational level play a huge role in decisions to file or not file.