By J Schipper
The main purpose of bankruptcy laws is to give people
hopelessly overburdened with debt a financial fresh start.
Bankruptcy filings are public records. However, under normal
circumstances, no one will know about the bankruptcy. Credit
Bureaus will maintain a record of the bankruptcy and it will
remain on the credit record for 10 years.
The most common reasons for bankruptcy filings are
unemployment, large medical expenses; seriously overextended
credit; marital problems, and other large unexpected expenses.
There are two ways a debtor can go bankrupt. The first and
common way is for an individual to file a voluntary petition
asking the Court to allow bankruptcy. The second, and rarely
used way, is for creditors to ask the Court to make an Order
that a person is bankrupt. In this way, a creditor can gain
payment, at least in part, for debts a debtor is refusing to
pay. In both these cases a Bankruptcy Trustee is required to
administer the bankruptcy.
There are two different types of legal bankruptcy proceedings.
Chapter 7, also called a straight bankruptcy, is a liquidation
proceeding. The debtor gives all non-exempt property to a
bankruptcy trustee who then converts it to cash for
distribution to creditors. The debtor is freed from all
dischargeable debts, usually within 4 months. Chapter 7 is
filed in cases where the debtor has few assets to lose, so
option gives a relatively quick release from debts. A debtor
file Chapter 7 again if more than 8 years have passed since
discharge of a previous Chapter 7 bankruptcy.
Chapter 13 bankruptcy is also called a reorganization
bankruptcy. It is filed by individuals who wish to pay off
their debts in 3 to 5 years. This type of proceeding is suited
for individuals with non-exempt property they wish to keep. It
is only an option for individuals who have predictable income
and whose income is sufficient to pay their reasonable
with some amount left over to pay off their debts.
Under the new Bankruptcy Law which took effect on October 17,
2005, individuals who can afford to make some repayment of
their debts must file Chapter 13. Only debtors who meet strict
financial requirements are allowed to erase their debts
completely through Chapter 7. Debtors must take an approved
Financial Counseling Course within 6 months of filing. Then,
their income is assessed according to the formula (monthly
income-expenses) X 60. If the result is $6,000 or less, and
unsecured debts are less than 25%, Chapter 7 is allowed. If
income is greater than $10,000 or unsecured debts are greater
than 25%, the debtor must file Chapter 13.
Once bankruptcy is filed, creditors are forbidden from
harassing the debtor. By law, creditors cannot initiate or
continue any lawsuits, wage garnishees, or even make telephone
calls demanding payments. Secured creditors such as banks
holding, for example, a lien on a car, will get the stay
if the debtor cannot make payments.
Spouses are legally unaffected by a debtor's bankruptcy if
are not responsible (did not sign an agreement or contract)
any of the debt. If they have a supplemental credit card they
are probably responsible for that debt. However, in community
property states, either spouse can contract for a debt without
the other spouse's signature on anything, and the spouse will
still be obligated to pay. There are some exceptions to this
rule, such as the purchase or sale of real estate; those few
exceptions do require the signature of both spouses on the
contract for both to be liable. But mundane purchases, such as
credit cards, do not require both spouses to have signed.
Community property states are: Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington and
Declaring bankruptcy does not mean that an individual's
subsequent access to credit is cut off. Whether a debtor is
allowed to keep credit cards after filing bankruptcy is up to
the credit card company. If the bankruptcy involves
a credit card, the card company will cancel the card unless
debtor reaffirms the debt. Even if the card has a zero balance
the credit card company might still cancel the card.
A number of banks now offer "secured"credit cards, for which
the debtor puts up a certain amount of money (as little as
$200) in an account at the bank to guarantee payment.
the credit limit is equal to the security given and is
as the debtor demonstrates ability to pay the debt.
Two years after a bankruptcy discharge, debtors are eligible
for mortgage loans on par with applicants of the same
profile who have not filed bankruptcy. Income stability and
size of the down payment are seen as more relevant than a past
bankruptcy filing. Though bankruptcy stays on a credit report
for 10 years, it becomes less significant as time passes.
People who have filed for bankruptcy are often better credit
risks than people who have not, and are struggling to pay
multiple accumulated debts.
Debtors filing for bankruptcy are allowed to keep certain
assets. The exemption for a homestead is limited to $125,000
the property was acquired within the previous 1215 days (3.3
years). The cap is not applicable to any interest transferred
from a debtor's previous principal residence which was
prior to the beginning of the 1215-day period. The value of
state homestead exemption is reduced by any addition to the
value brought about on account of a sale of nonexempt property
made by the debtor with the intent to evade or defraud
creditors during the 10 years before the bankruptcy filing.
An absolute $125,000 homestead cap applies if either the court
determines that the debtor has been convicted of a felony
demonstrating that the filing of the case was an abuse of the
provisions of the Bankruptcy Code, or the debtor owes money
to criminal acts. This limitation is not applied if the
homestead property is "reasonably necessary for the support of
the debtor and any dependent of the debtor."
Some laws relating to bankruptcy vary from state to state.
Legal residency is determined by which state the debtor lived
in the 730 days (2 years) before filing; or if the debtor did
not live in a single state in the previous 2 years, the state
of residence where the debtor spent the majority of the 180
period preceding the 2 years. If this leaves the debtor
ineligible for any exemptions then the debtor is allowed use
federal exemption laws.
In some cases of Chapter 7 bankruptcy, tax debts are also
out, but only if stringent conditions are met: the IRS does
have a tax lien against the debtor's property; no fraudulent
tax returns have been filed; tax liability is due for a tax
return filed at least 2 years before the bankruptcy filing;
tax return was due at least 3 years ago, and the taxes were
assessed at least 8 months before filing for bankruptcy.
Student loans from government and private organizations are
usually not wiped out, unless repayment would cause undue
hardship to the debtor.
All non-exempt property, such as real estate, cars and
motorcycles will then be liquidated by the trustee.
There is no legal requirement to use a lawyer to file for
bankruptcy, and debtors can do so themselves for about $300;
however, it is strongly advised the use the services of a
specialized bankruptcy lawyer as bankruptcy law is complex. A
bankruptcy lawyer is well worth the cost, which is usually
$1,600 to $2,000. Debtors will recoup the legal fees many
over through peace of mind and avoidance of stress in addition
to actual money saved by following the bankruptcy attorney's
About The Author: J Schipper writes about Money Matters