With unemployment hovering near 10 percent and a credit crisis brought on by irresponsible lending and borrowing, it’s no surprise that an increasing number of Americans are turning to bankruptcy protection.
More than 1.9 million Americans filed bankruptcy in 2009, the highest number since a law passed in 2005 made filing bankruptcy more difficult. Bankruptcies have been trending upward since the onset of the financial crisis – they rose by 40 percent in 2007, 33 percent in 2008 and 32 percent in 2009.
While bankruptcy may seem like the only way out for many Americans stuck in upside down mortgages or who are buried in credit card and other debt, it does have some serious consequences. A basic understanding of bankruptcy and what it entails is vital to determining if it is the best route for you to shore up your finances.
Bankruptcy is a legal declaration of a debtor’s inability to pay back money owed to creditors. Creditors can file bankruptcy petitions against individuals or organizations to recoup at least some of what they are owed or to enter into an agreement that restructures the debt to make it more easily repayable. Most bankruptcies, however, are voluntary bankruptcies initiated by the debtor individual or organization.
A bankruptcy may result in the debtor selling off assets to repay all or a portion of debt, entering into a plan to pay off all or a portion of debt or having a court forgive all or a portion of debt, or a combination of the three.
Bankruptcy has been around since Classical times. The Roman Republic had a bankruptcy court, and Spain actually declared national bankruptcy four times in the late 1500s. In the U.S., modern bankruptcy law is derived from English bankruptcy law, which in its earliest form benefited creditors primarily. Under the old English law, debtors who became insolvent could have all of their property confiscated and be imprisoned. Over time these laws became more equitable, and debtors gained rights.
In the U.S., bankruptcies are adjudicated in federal bankruptcy court and federal law rules regarding procedure. However, state law is followed with regard to property rights in bankruptcy proceedings.
When a debtor files for bankruptcy, some of his or her personal property may be exempt from liquidation to settle debts. Exemptions vary from state to state, but most states have exemptions that cover all or most of the value of the debtors home, certain personal effects, personal vehicles and tools of trade.
When filing for bankruptcy, individual debtors must chose between a state or federal list of exempt items. Exemptions apply only to personal bankruptcies, not corporate or organization bankruptcies.
There are several different types of bankruptcies in the U.S., with some applicable only to businesses and others applicable only to individuals.
The bankruptcies specific to individuals include:
Chapter 7 bankruptcy: Under this form of bankruptcy, the bankruptcy court seizes any property not exempt and sells it to pay off the debtors’ debts. After the sale, the debtors’ remaining debts are discharged.
In practice, most property owned by the debtors in this type of bankruptcy is exempt, and the action merely results in the forgiveness of the debtors’ debts. However, some debts (child support, criminal restitution, student loan debt, spousal support) are not discharged in this form of bankruptcy.
Recent law has made it more difficult to obtain a Chapter 7 bankruptcy. The BAPCPA, passed in 2005, imposed a means test on individuals seeking to file a Chapter 7 bankruptcy. This means tests forces middle and high income debtors to enter into a Chapter 13 bankruptcy instead.
Chapter 12 bankruptcy: A Chapter 12 bankruptcy is a bankruptcy plan designed specifically for family farmers and fishermen. The debts of these individuals are generally larger than those of individuals filing Chapter 13 bankruptcies, so the Chapter 12 bankruptcy was drafted to allow for this and to provide a more streamlined and less costly method for filing bankruptcy.
Individuals filing for Chapter 12 bankruptcy must owe no more than $3.5 million. A farm owned by a corporation or organization may file Chapter 12 only if 50 percent of the farm is owned by one family or individual.
In a Chapter 12 bankruptcy, the family farmer or fisherman is required to make payments on his or her debt for three to five years. At the end of this period, if all payments are made, the remainder of his or her debts are discharged.
Chapter 13 bankruptcy: In a Chapter 13 bankruptcy, the debtor must enter into a repayment plan to pay off all or a portion of their debts. This form of bankruptcy is primarily for debtors who earn an income and can pay back all or part of their debts.
Under a Chapter 13 bankruptcy, debtors propose a repayment plan to make payments on their debts over a three to five year period. For debtors with an income less than the state average, their plan will be for three years in most cases. For debtors with larger incomes, the plan will be for five years. At the end of the repayment period, if the debtor has made all payments, the remainder of his or her debts are discharged.
To find out what type of bankruptcy best fits your individual circumstances, you may want to consult with a bankruptcy attorney or a financial advisor. Filing bankruptcy is no light matter, and individuals should consider other options such as debt consolidation and other programs before filing bankruptcy. |
