You have fallen behind on your bills and you see no way to catch up. Is bankruptcy the answer? Or is there another solution?
There is no question that we are living in difficult economic times. Every day, it seems, there is news of another plant closing or a company’s outsourcing hundreds of jobs. Many companies have put a freeze on raises and finding a new job is often not an option. Bills pile up and many people face a constant juggling act as to which bill to pay and which to delay. It is no wonder that people find themselves swallowed up by overwhelming debt and can often see no clear solution. Sometimes bankruptcy seems like the only way out. But is it? In order to make the decision as to whether or not to take this step, it is important to understand how the process works and to examine other possible options.
Bankruptcy laws originated in England in the early 1500s. These laws were very punitive to the debtor and were written to favor the creditor. Early U.S. laws were temporary in nature and repealed once economic conditions improved. It wasn’t until 1898 that the first laws were enacted that offered the debtor protection from creditors and the opportunity to reorganize. Over the years, the laws have been rewritten numerous times with the last major reform, the Bankruptcy Reform Act of 1994, signed into law on October 22, 1994. The current U.S. bankruptcy laws are detailed in Title 11 of the United States Code and subdivided into eight chapters, each chapter dealing with a specific point of the process. Several of the chapters outline the actual bankruptcy procedures and the rest address specific applications of the law. Chapters 7 and 13 apply to personal bankruptcy.
Chapter 7 – Liquidation
Chapter 7 requires an individual to liquidate all but exempt properties and pay his creditors with the proceeds from the sale of this property. Secured debt – where tangible personal property has been purchased through a loan from the creditor – is given priority for repayment. Non-secured debt – generally credit card debt – is paid if there is any money left after the secured debt is paid. All debt that cannot be paid off as a result of the liquidation will be considered for discharge. It is important to note that there are certain types of debt that cannot be discharged including tax debt, federally insured school loans and court-mandated payments such as alimony, child support and retribution for crimes.
The debtor files a bankruptcy petition, which includes a financial statement, list of assets and liabilities, an income statement and list of requested exemptions. Those exemptions can include home and auto equity, a portion of the person’s clothing, furniture and personal items. Exemptions vary from state to state.
A trustee is appointed to supervise the liquidation process and all listed creditors are notified of the action. From this point on creditors are forbidden to contact the debtor. A meeting is arranged and the debtor must appear in Bankruptcy Court to answer questions posed by representatives of his creditors. The creditors can object to certain exemptions or challenge the debtor during this hearing. After the hearing, they have ninety days to formally file their objections. Normally, if no objections are filed, the discharge is granted once this time period has elapsed.
Once the bankruptcy has been discharged, a record of this action remains on the individual’s credit report for seven years. Certainly, this can have a detrimental affect on one’s future credit standing. It is difficult to obtain credit for several years after the discharge and interest rates are higher for those who have gone through this process than for those who have not. Credit can be reestablished, but it takes time and a degree of effort.
One of the consequences of filing Chapter 7 is that anyone who cosigned with you on a loan will automatically assume full responsibility for that loan. And, since your creditors know that they will most likely not get anything from you, they will redouble their efforts to collect from your cosigner. The ramifications for the cosigner are serious and, in all fairness, you should discuss your financial problems with them before filing Chapter 7. For example, if you are in danger of having your vehicle repossessed, you should notify the cosigner immediately. That person may be able to pick up the payments and take possession of the car. This is certainly preferable to having to pay the balance of a car loan where the car has been repossessed.
Chapter 13 – Reorganization
Chapter 13 allows an individual to reorganize his debts and set up a repayment plan that will span a three to five year period. This is normally the best route for individuals who have fallen behind on mortgage or car payments and want to avoid foreclosure or repossession. One important stipulation, however, is that an individual must be able to show evidence of a continuing income in order to be considered for this action.
Initially, the debtor files a bankruptcy petition, which will include a financial statement, list of assets and liabilities and an income statement. Once the petition is filed all action against the debtor by the individual creditors cease.
Once the petition is filed, the petitioner must prepare and file a repayment plan and file this document with the court. After the plan is filed, the trustee and creditors review it and can either object or accept the plan as written. If the plan is accepted, repayments begin and, as long as the plan is followed and no payments are missed, the bankruptcy is discharged at the end of the specified period of time. In Chapter 13, cosigners are protected and, as long as the loan is being paid, the creditor will have no reason to contact them.
If payments are not made according to the schedule, foreclosure or repossession proceedings will resume and the person has no choice but to surrender his property. As with Chapter 7, the bankruptcy remains on an individual’s credit report for seven years and this can be detrimental in terms being able to secure credit in the future. Creditors do look more favorably on persons filing Chapter 13 since debts are being repaid. However, in a Chapter 13 filing, the bankruptcy is not discharged until the end of the repayment period and the seven years begin at that point. The bankruptcy remains on the credit report, then, for up to 12 years after the initial filing.
Alternatives to Bankruptcy
In a perfect world, we would always have enough money to pay all of our financial obligations on time every month. But sometimes circumstances beyond our control prevent us from being able to do this. Once you fall behind, it is very difficult to catch up. A lengthy layoff, cut in pay, divorce or relationship breakup, illness or other disruption to a person’s income can have devastating effects. The key is not to ignore the bills as they come in but to deal with them head-on.
Contact your creditors as soon as your financial condition changes and explain your situation to them honestly. Most creditors do not want to repossess or foreclose. They really don’t make money on these transactions. A creditor may be willing to work with you, reducing payments or extending the term of the loan. You may be pleasantly surprised at their reaction.
Once you have dealt with your creditors, you must reduce your personal expenses in order to make the payments. This is the difficult part but there is no way around it. This may mean selling your second car or finding a less expensive place to live. Consider selling items on an online auction. You may be able to get money from your 401K or insurance policy. Look at your monthly bills and eliminate anything that is not essential – cable, cell phones, club memberships, etc. You may even find it necessary to find a part-time job. All of this will be painful but taking this action can help you to prevent having to go through bankruptcy.
If you are already overwhelmed or your creditors refuse to work with you, try Consumer Credit Counseling Service, a non-profit agency that was established to help the consumer. A counselor will meet with you and review your situation. If it is feasible, the counselor will work with your creditors setting up repayment plans.
Once a repayment plan is established, the individual writes one check to CCCS each month and the bills are paid by the agency from that money. For many people, this is a viable alternative to Chapter 13 and by using this service, an individual will essentially accomplish the same goal but without the stigma of the bankruptcy on his credit report.
The disadvantage to using this service is that late or slow payments are still noted on an individual’s credit report. However, the fact that CCCS is being used in the repayment process can be noted on the report. You are responsible to make the payments on time and if you default on the plan, you will be dropped from the program. The counselors are there to help but an individual must be willing to participate in the program and follow the guidelines to the letter.
CCCS receives a commission from the creditors on monies that they are able to collect. There have been some instances where overzealous counselors have suggested repayment plans for people when bankruptcy would have been advisable. A good counselor will not mislead you into repayment plans that are doomed to failure.
Certainly there are instances where an individual has no alternative but to file for bankruptcy but before taking any legal action, it is advisable to explore other options. Things may seem worse than they actually are and a professional can guide you through the process. If bankruptcy is the only viable option, consult an attorney. Most attorneys offer an initial consultation for free and will review your situation, advising you as to which route best fits your personal circumstances. Fees vary depending on the complexity of the case and will include filing fees, court costs and the attorney’s fees.
Fortunately, there are solutions for people who find themselves buried in a mountain of debt. None are without consequences, but with some research and effort, the crisis can be overcome and an individual can survive and move forward. The key is to face the problem and deal with it.