Bankruptcy is not necessarily the state of having no money. For our purposes,
, bankruptcy is a legally declared inability to pay creditors.
Creditors can report their debtors as bankrupt, but it is more common that
"voluntary bankruptcy" occurs; this is when a debtor files for the status him or
herself. By declaring bankruptcy, an individual or corporation can then take
advantage of legal protections offered by the government.
Chapters 7 and 13
The two types of bankruptcy that are most
relevant to this discussion are Chapter 7 and Chapter 13. These could be for
individuals or corporations, and they're the most common forms of bankruptcy in
the United States.
Exemptions vary from state to state, but can include:
In the case of the former,
the government will send a trustee to liquidate the property of the debtor and
distribute the money to the creditors. There is usually a large amount of
property, however, that is not seized. The prevailing wisdom that the government
will leave most of your stuff alone (exempt) has led to abuses of Chapter 7
bankruptcy by people simply looking to avoid paying off their debts. This is not
always the case, however; anyone filing for Chapter 7 should be fully prepared
to lose valuable property up to and including his or her home.
- Equity in a home or a car
- Tools of the trade (i.e., things you need in order to work)
- Certain personal effects
Chapter 13 is a reorganization of debt
that puts the debtor on a long-term plan to pay off their creditors. It's also
called a "wage earner's plan," because it is proposed under the assumption that
the debtor can earn enough over the course of 3 to 5 years to pay what he or she
owes. All new debts must be paid within this period as well, so monthly mortgage
and any other liens must be taken care of on top of the Chapter 13
Why File: Automatic Stay
One of the most appealing reasons to
file for bankruptcy is the automatic stay that the court imposes. This keeps
creditors from taking action against you concerning your debts to them. This is
why bankruptcy is often referred to as "bankruptcy protection." In some cases,
it could keep you out of jail! If you are concerned that a collection agent is
going to take more from you than the government would, you might consider
getting their (the government's) help.
Why Not to File
Filing for bankruptcy can do tremendous damage
to your credit. This will affect your ability to open a bank account, get a
credit card, buy a car, or buy a house. Bankruptcy will put you in financial
strain for a long while. Paying off your debts traditionally is always going to
Other Important Information
- Under legislation passed in 2005, all individuals filing for bankruptcy must
undergo credit counseling as a prerequisite for qualifying.
- An individual who files for Chapter 7 may be denied and, in essence, forced
to file for Chapter 13 if it is found that he or she would have enough
disposable income in the next 3-5 years to handle it.
- The government has cracked down as of late on bankruptcy abuse. Expect a
thorough vetting of your assets and spending habits before you qualify.
bankruptcy is for people who are up against the wall.
No matter how appealing the idea of having creditors off your back might seem,
this is nothing to be entered into lightly. Explore your other options first,
but, as a last resort, bankruptcy could save you from complete financial