The Reality of Filing for Personal Bankruptcy

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Bankruptcy. It's a word that conjures up ideas of deadbeats, not paying their bills, ignoring their responsibilities and looking for a way to avoid financial responsibility. The reality couldn't be further from the truth. Many honest, hard working Americans are finding out the hard way that current economic pressures afford them little opportunity to repay their debts and find their financial footing.

While bankruptcy is by no means a pleasant experience, the alternative can be far more devastating. Many people have found that a job loss (recently lay-offs are common), an unexpected medical problem, foreclosure or an upside-down mortgage have left them with no choice but to begin depleting retirement accounts or other long-term savings in a last ditch effort to stay above water, only to find themselves in the same situation a few months later, but without any retirement assets.

If bankruptcy had been considered earlier, those retirement assets would have been protected by the US Bankruptcy Court, and debts would have been discharged by some other reasonable means.

It is important for struggling Americans to be aware of their options regarding bankruptcy protection from the US Court System, and the fact that it is in place to protect regular, honest people who have found themselves in an unfortunate financial situation that is outside of their own control.

Who is Filing for Bankruptcy?

The types of situations that many bankruptcy lawyers have said are common are some combination of lay-off or other job loss, an unexpected medical problem, and or a mortgage that has become unmanageable due to significant declines in housing values.

These are not people who made irresponsible decisions, but rather, honest, well intentioned people who have found themselves in serious financial trouble for reasons that are outside of their control.

The mortgage crisis and housing market plunge has put an especially heavy burden on many people; Combined with job loss or "under-employment", this one-two punch has left many people in need of serious financial assistance. It is only after having exhausted all other options do they consider the option of bankruptcy. In many cases, waiting too long to look into bankruptcy can make things even more difficult.

Personal Bankruptcy "Protection"

The term bankruptcy "protection" is often used when describing personal bankruptcy, for good reason. Bankruptcy laws offer financially distressed debtors a way to force creditors into accepting a reasonable, and realistic payment in return for discharging, or eliminating debts that would otherwise never be repaid. From the perspective of a creditor, the idea is to recoup all money owed, irrespective of any other creditors interests. This fact makes it impossible to find an acceptable solution without a neutral third party running the show.

During a bankruptcy proceeding, a bankruptcy trustee is appointed as that neutral third party. The trustee is responsible for finding a solution that best benefits all the creditors, as well as the debtor.

Chapter 7 vs. Chapter 13

Most personal bankruptcies will be under one of these two bankruptcy codes. Depending on the particular financial circumstances, the best option will be a chapter 13 "repayment plan", or a Chapter 7 "liquidation". Both types of bankruptcy have their advantages and disadvantages.

Chapter 7

Chapter 7 is the most common option chosen for those looking to file for bankruptcy protection. In a Chapter 7 bankruptcy, the bankruptcy trustee will try to liquidate some of the assets of the debtor in order to raise capital and repay some of the debts owed. Many assets, such as a primary residence and retirement assets, are "exempt", meaning they will not be liquidated.

Chapter 13

Unlike Chapter 7, Chapter 13 involves creating a repayment plan that is realistic based on the income of the debtor. This type of bankruptcy is often referred to as a "wage earners" bankruptcy due to the income requirement. In a Chapter 13, the bankruptcy trustee will evaluate all the outstanding debts, as well as income level to work out a 3-5 year repayment plan during to which the debtor must adhere and all creditors must accept.

Often times, during the course of a Chapter 13 petition, many debts will need to be "crammed down" to more realistic market values. For example, someone might owe $20,000 on a car that is only worth $10,000. In this case, $10,000 of the debt could be removed in order to make repayment more realistic.

Chapter 13 also offers other advantages, such as stopping a foreclosure proceeding, allowing a homeowner to keep their home and barring any form of debt collection efforts by the lender.

When to Consider Bankruptcy

Bankruptcy should not be considered as only a last ditch effort, because it is usually much more effective before other options, such as spending retirement money, are exhausted. Rather, bankruptcy should be considered as an option once a serious financial situation has begun.

It is important for people to be realistic about their finances. Someone may have made a decent living a year or two ago, but the likelihood of that job market returning any time soon is small. No one should be forced to sell their assets, dig into a 401k, or try to stave off a foreclosure by borrowing money from family. It is exactly these types of situations for which bankruptcy laws were enacted.

Talking to a bankruptcy lawyer early on is the best option to help debtors keep as many options open, before their financial world comes crashing down.