 During 2008, consumer bankruptcy filings jumped by almost 33 percent compared to 2007, and January 2009 saw an increase of 34.4 percent over January 2008 according to the American Bankruptcy Institute. More than a million people filed for bankruptcy in 2008, the highest figure since 2005 when major bankruptcy law changes came into effect, causing an avalanche of people to file for bankruptcy within a matter of months. Yet for many reasons bankruptcy is often not the best course of action, so you should consider your options very carefully if in financial trouble. For instance, bankruptcy does not clear every kind of debt, and often assets such as your home cannot be taken by a creditor anyway. The mark of a bankruptcy, meanwhile, remains on your credit score up to ten years. It can make obtaining good credit and insurance difficult, and it can also disqualify you from applying for certain jobs. |
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Some also point to the personal and emotional effects that the bankruptcy procedure can have on your personal life and self-esteem. It is an intrusive process, you have to disclose many details of your finances to the court and it is a public process too. A Chapter 7 bankruptcy can mean losing your property, while a Chapter 13 may mean you will spend five years asking permission to spend your money .
So you really need to mull things over very carefully before deciding whether bankruptcy (and indeed what type) will work for you. There will also be some legal hoops through which you will have to jump and some reliable, competent advice to help you through the process will not go amiss.
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When is the Right Time to File for Bankruptcy
If you find no repayment method, no alternatives and no possible agreement available, you can start thinking about bankruptcy as a way of protecting your property. Of course you DO NOT really need to file for bankruptcy if what you own cannot be legally taken by a creditor.
You can also consider filing for bankruptcy if the situation is affecting your ability to deal with the day to day, your family, your work or your friendships. Your physical integrity and mental health are worth protecting.
Every case is different, so consulting a bankruptcy specialist is very important, but there are some generalizations that we can make about who is eligible, and who should consider bankruptcy:
- Those who are older
- Those with more dependents
- Those with a lot of debt
- Those with small cash reserves or retirement savings
- Those with a lot of dischargeable debt compared to non dischargeable
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Understanding Bankruptcy
Bankruptcy allows a debtor to cancel certain types of debt through a court order known as a 'discharge'. Not all debts can be discharged, non-dischargeable debts are also known as 'secure debts'.
There are various types of bankruptcy, each type providing creditors with different methods to recuperate some of the debt and with varying degrees of impact on the debtor. The different types of bankruptcy are known by the chapter of the Bankruptcy Code that they appear in, there are six chapters defining different bankruptcy processes. Of those six, only two are generally used in personal bankruptcy cases: chapter 7 and chapter 13.
Chapter 7 Bankruptcy
The most common type is the Chapter 7 Bankruptcy, which, according to the American Bankruptcy Institute made up 67 percent of all consumer bankruptcies in 2008. In this instance, a trustee will be appointed to administer the bankruptcy filing process. The trustee will take the debtor's assets and create an 'estate' to then share out amongst the creditors.
The debtor's right to keep exempt property is taken into account (exempt property is excluded by state or federal law from the estate and cannot be liquidated), the rights of secured creditors also play a part in the equation. In many chapter 7 cases much of the property is exempt, so there is no actual liquidation of the debtors assets (a no-asset case).
Normally a discharge will be issued, releasing the debtor from certain dischargeable debts. A discharge should come through a few months after the filing of the petition. Amendments to the Bankruptcy Code under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require a "means test" to check that debtors qualify, and if their income exceeds a certain threshold, they may not be eligible for chapter 7. This type of bankruptcy can remain on your credit report for up to ten years.
Chapter 13 Bankruptcy
It is the second most common option but often a more attractive one. It allows a debtor with a guaranteed income to enter into a process which protects the debtor's assets. The debtor will agree to pay off part of the debt over a given time (usually three to five years), how much is to be forgiven will be decided by the court.
Chapter 13 is very different to chapter 7, the debtor usually retains the property and makes payments to creditors through the trustee. It is based on the debtor's expected income over the duration of the plan. The debtor will receive a discharge of any debts when all payments under the plan have been made. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.
Under chapter 13 bankruptcy, more debts are eliminated than under chapter 7, and the bankruptcy will only remain on your credit report for up to six years. Also, if a friend or relative helped you to get financing by co-signing a loan agreement, a Chapter 13 bankruptcy will protect them, but Chapter 7 will pass any debt you don't pay, onto them.
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The Automatic Stay
A bankruptcy filing triggers an "automatic stay," which is issued by the court and which theoretically stops any further creditor action temporarily, giving the debtor some breathing space.
Not all actions by a creditor can be stopped by an automatic stay, particularly since the Bankruptcy Abuse and Consumer Protection Act of 2005. Much of the Act's emphasis was aimed at limiting what it considered illegitimate, serial bankruptcies perceived to be an abuse of the system. So since 2005, those with multiple bankruptcies have had their eligibility restricted, the length of the automatic stay limited and the options available to their creditors increased.
In any case, it is important to recognize the temporary nature of the automatic stay, especially as the Bankruptcy Abuse and Consumer Protection Act of 2005 made it easier for secured creditors to claim that their interests have to be protected.
Even if the creditor makes no attempts to lift the stay, a chapter 7 bankruptcy will cease to to protect your property once the bankruptcy process comes to an end. A chapter 13 bankruptcy, on the other hand, will allow to keep your property by committing you to paying off your debt over a period of time.
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Preparing for the Bankruptcy Process
After looking at your situation thoroughly and pondering your options, you will have a better idea about whether bankruptcy is right for you. If you decide that it is, you will have to take several steps in preparation for the bankruptcy process.
Step 1
Be aware of what debt is non-dischargeable, as that is the debt that will stay with you after all the other debt has been discharged. You could concentrate all of your present payments on your non-dischargeable debt to pay off as much as you can. If all the debt is non-dischargeable, you can stop paying altogether as it will all be discharged anyway.
Step 2
A good bankruptcy lawyer will be needed to asses your property, and to help you to convert as much of the non-exempt assets into exempt ones. The local expertise of the bankruptcy lawyer is the key when maximizing your exemptions because a lot of interpretation is involved, and you need to be careful that the creditors cannot argue that you are trying to impede them from obtaining the non-exempt property which is legitimately theirs.
Step 3
You may wish to prioritize some debts over others, possibly because they are owed to family or friends, but paying them off in advance could be interpreted by the trustee as fraudulent or illegitimate because he considers those creditors 'insiders'. The trustee can scrutinize payments made in the 90 days prior to the bankruptcy filing, but if the payment was made to an insider, the period can be up to 12 months.
An alternative to paying certain debts off before the bankruptcy is to reaffirm the debt after the bankruptcy, which means that the debtor waives the discharge and continues to pay off the debt. You can also pay the debt informally if you wish.
Step 4
Take your money out of institutions to whom you owe money, do it before you start any bankruptcy proceedings and put it in a new account in another bank that has nothing to do with the creditor.
Step 5
Don't use your credit anymore. Large cash advances (over $1075) taken up to 60 days prior to the bankruptcy filing, and any luxury goods bought with credit within the same period are non-dischargeable. Credit used after you have filed may be considered fraud, as they won't believe that you intend to pay it back.
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Steps of the Bankruptcy Process
1. Attending the 'Pre-Filing Meeting'.
The law demands that debtors attend a pre-filing meeting before the bankruptcy filing process begins. This session is supposed to help consumers determine whether or not they are eligible for bankruptcy, and to figure out if there are other options available to them.
These counseling sessions must provide debtors a certificate that shows fulfillment of the counseling session, needed when you file. Keep in mind that it will cost the debtor between $25-$75 unless there is no way that they can pay, in which case they will need to request a waiver from the courts.
2. Getting Professional Help.
Once you have made your mind up, the first thing you will need to do is to get some good professional help. If you choose to go ahead without an attorney, you will need a paralegal to help you with the paperwork.
An attorney could meet you for a one-off fee to assess your financial situation, then go ahead and begin the paperwork or advise you on what's next if you prefer to continue without an attorney.
3. Filing the Bankruptcy Paperwork.
Some 40 to 80 pages will make up the bankruptcy petition and this can, at times, cause some difficulty. Amongst other things, the debtor will have to expose their current income, tax information, assets and debts, and all their creditors' contact information.
If the paperwork is filled out incorrectly a court may well ask you to do it all once again. Errors in the paperwork can also put your assets at risk. For this reason it is sensible to get help for the process of filing paperwork, a professional can also help by actually taking it to the courthouse and ensuring it gets to the right person.
4. Contacting Creditors.
5-7 days after filing, the court will send you a notice and a Certificate of Intentions notifying your eligibility for filing. For a Chapter 13 bankruptcy, a trustee will be appointed to help gather information for your repayment plan. The trustee will contact your creditors to determine your debt and how you can repay it.
In the case of a Chapter 7 bankruptcy, you may be required to contact creditors, confirming your bankruptcy using the Certificate of Intentions and court notice.
5. Creditor’s Court Appearance or Meeting.
Usually a debtor will not have to step into a court, but they will have to hold a meeting with their trustee. The creditor is invited to attend in order to set out their case for repayment or repossession.
Normally creditors will only attend if it is an asset case where they are considering the repossession of a house or car. The trustee will ask about the debts to work out whether repayment or absolution of debts should happen.
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6. Discharge Meeting. Prior to emitting the discharge paperwork, a court will ask you to go to a pre-discharge meeting with a government approved finance agency. You will discuss your future after bankruptcy, credit scores and how to avoid further financial trouble.
The approved Certificate from the meeting will allow you to receive the discharge paperwork from the court. In a Chapter 7 bankruptcy, this may take 3 to 6 months, in the case of a Chapter 13 you will get the discharge when the repayment plan has been completed.
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So Remember...
The magnitude of a bankruptcy demands much thought on your part, and the assistance of others. It is a step that, once taken, you cannot go back on, so you have to ensure that it is the right thing to do and that it is done properly, so you get as much out of it as possible. Never forget that bankruptcy courts and laws are different everywhere and that you need focused, expert knowledge in order to protect your property efficiently. |
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Grub Street Writing and Translation: Leaving out the parts that people skip |
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