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Bankruptcy
Bankruptcy is a financial state in which a person or organization wholly or partially is unable to meet their financial obligations. In the United States, bankruptcy is controlled by a federal law adopted in 1898 and amended several times, as by the Chandler Act (1938) and the Bankruptcy Reform Act (1978).
Bankruptcy proceedings may be voluntary (instituted by the debtor) or involuntary (instituted by creditors). The debtor may be insolvent—i.e., unable to pay all debts even if the full value of all assets were realized—or may become insolvent when current obligations mature. Bankruptcy is also permitted when the discharge of debts would otherwise be unduly delayed, e.g., if the debtor has fraudulently transferred property to put it out of a creditor's reach. When a person or corporation has declared or been adjudged bankrupt, preferred creditors (e.g., unpaid employees, or the federal government) are paid in full, and the other creditors share the proceeds of remaining assets.
There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. The current filing fees are currently $160. Attorney fees are additional and can vary widely. The consequences of bankruptcy are significant and require careful consideration.
Chapter 13 allows you, if you have a regular income and limited debt, to keep property, such as a mortgaged house or car, that you otherwise might lose. In Chapter 13, the court approves a repayment plan that allows you to pay off a default during a period of three to five years, rather than surrender any property.
Chapter 7, known as straight bankruptcy, involves liquidating all assets that are not exempt. Exempt property may include cars, work-related tools and basic household furnishings. Some property may be sold by a court-appointed official-a trustee-or turned over to creditors. You can receive a discharge of your debts under Chapter 7 only once every six years.
Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow you to keep certain assets, although exemption amounts vary. Personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. Also, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.
You should be aware that any co-signor automatically becomes liable for the full amount of a co-signed debt. If this is not what you intend, you should not file or you should make arrangements with the court for repayment. But even debts you do not want included (such as a loan from a friend) must be included since the court does not accept any partiality.
You cannot claim any credit debts recently incurred. So, if you know you are going to file bankruptcy and decide to run all your credit cards to their limits you should reconsider. The law views this as fraud and credit card companies are very aggressive in protecting themselves in this type situation. You should also be aware that bankruptcy will remain on your credit report for 10 years and when seen by a potential creditor will lower your credit score thereby increasing the chance of higher interest rate. Bankruptcy can also have an impact on your ability to obtain and keep government security clearance.
The bankrupt individual receives more lenient treatment in the United States than in perhaps any other country, so that business initiative is not stifled by the threat of criminal or civil penalties following unintentional commercial failure. This ideal is evident in Chapter 11 of the bankruptcy code, which permits courts to reorganize the assets of failing businesses instead of ordering complete liquidation of these assets. The 1978 revision of the code made it easier for corporate management to remain in control of a company during reorganization. These more lenient provisions led to a rapid increase in filings in the 1980s and 1990s; Congress has debated making further changes in the law to reverse this. Chapter 9 provides for the reorganization of bankrupt municipalities.
Bankruptcy is not a simple solution
- Bankruptcy does not relieve all debts...
Debts not dischargeable generally include back taxes less than three years old, student loans, alimony, child support and debts incurred through fraud.
- Bankruptcy can be expensive...
In addition to filing costs and attorney fees, a notation that you filed for bankruptcy will remain on your credit report for seven to ten years, depending on the chapter you file. This could make it difficult to obtain any type of new loan. And, if you are able to obtain new credit, it may be hard to find a loan with affordable interest rates and repayment terms.
- Bankruptcy affects more than your credit...
Besides the obvious emotional issues involved with filing bankruptcy, it can also affect your ability to rent an apartment or obtain affordable insurance. In some fields, a bankruptcy could adversely affect your ability to gain employment or promotions.
- Bankruptcy does not change your financial habits...
Filing for bankruptcy may not solve your long-term financial problems. Lifestyle changes may prove to be more beneficial
Here is the latest:
A law was passed on April 20th 2005 that when it goes into effect six months from its passing will change bankruptcy law. The new law will make it much harder to wipe out medical bills, credit card debt, car loans and other debt. Instead, the new laws push for more Chapter 13 filings, which will require repayment schedules.
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