Bankruptcy – Is It A Practical Option?

There are several advantages of filing for bankruptcy, according to the American Bar Association (ABA). By far, the most important, the ABA contends, is that debtors may obtain a fresh financial start.

Consumers who are eligible for Chapter 7 may be forgiven (discharged from) most unsecured debts. A secured debt is one which the creditor is entitled to collect by seizing and selling certain assets of the debtor if payments are missed, such as a home mortgage or car loan. With those two major exceptions, most consumer debts are unsecured.

You may be able to keep (that is, exempt) many of your assets, although state laws vary widely in defining which assets you may keep.

Collection efforts must stop as soon as you file for bankruptcy under Chapter 7 or Chapter 13. As soon as your petition is filed, there is by law an automatic stay, which prohibits most collection activity. If a creditor continues to try to collect the debt, the creditor may be cited for contempt of court or ordered to pay damages. The stay applies even to the loan that you may have obtained to buy your car. If you continue to make payments, it is unlikely that your creditor will do anything. However, if you miss payments your creditor will probably petition to have the stay lifted in order to either repossess the car or to renegotiate the loan.

What are the disadvantages?

Since your bankruptcy filing will remain on your credit record for up to 12 years, it may affect your future finances. A bankruptcy is a troublesome item on your credit record, but often debtors who file already have a troublesome history.

In one respect, bankruptcy may improve your credit records. Because Chapter 7 provides for a discharge of debts no more than once every eight years, lenders know that a credit applicant who has just emerged from Chapter 7 cannot soon repeat the process.

Hurdles you must clear to file chapter 7 or chapter 13 bankruptcy

The following explanation is not to be considered legal advice. It is simply a brief overview of a very complex topic. People considering bankruptcy should consult an attorney.

There is a lot of misinformation about filing for bankruptcy. Filing bankruptcy will not cause you to lose your job. Also, it will not cause you to lose your Social Security or other government benefits. In fact, the law provides that the government cannot discriminate against you because you have filed for bankruptcy.

Chapter 7: One of the primary purposes of bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” The debtor has no liability for discharged debts. Although an individual chapter 7 case usually results in a discharge of debts, the right to a discharge is not absolute, and some types of debts are not discharged. Moreover, a bankruptcy discharge does not extinguish a lien on property.

In addition to the petition, the debtor must also file with the court the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules plus:

1. A list of all creditors and the amount and nature of their claims;
2. The source, amount, and frequency of the debtor's income;
3. A list of all of the debtor's property; and
4. A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.

Debtors must also provide the assigned case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).

Individual debtors with primarily consumer debts have additional document filing requirements. They must file: a certificate of credit counseling, and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase of income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. A husband and wife may file a joint petition or individual petitions. Even if filing jointly, a husband and wife are subject to all the document filing requirements of individual debtors.

During the bankruptcy process, the court may deny the bankruptcy filing for a number of reasons. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records; failed to explain satisfactorily any loss of assets; committed a bankruptcy crime such as perjury; failed to obey a lawful order of the bankruptcy court; fraudulently transferred, concealed, or destroyed property that would have become property of the estate; or failed to complete an approved instructional course concerning financial management.

Caution! A Chapter 7 bankruptcy will wipe out only your personal obligation to pay the debt. Any lien recorded before you file for bankruptcy remains.

Chapter 13: A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts.

Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years.

You may file Chapter 13 if you are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy.

You may file Chapter 13 if you are a family farmer who wants to pay off your debt, but you do not qualify for a Chapter 13 family farming bankruptcy because you have a large debt unrelated to farming.

You have valuable nonexempt property. When you file for Chapter 7 bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you'd have to give up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option.

The following debts are NOT discharged:

• Debt for trust fund taxes;
• Taxes for which returns were never filed or filed late (within two years of the petition date);
• Taxes for which the debtor made a fraudulent return or evaded taxes;
• Domestic support payments;
• Student loans;
• Drunk driving injuries;
• Criminal restitution;
• Civil restitutions or damages awarded for willful or malicious personal actions causing personal injury or death.