bankruptcy

Can bankruptcy help you?

Many people are reluctant to consider bankruptcy as a way to deal with their financial problems. They have worked hard, always paid their bills, and are justifiably proud of that.

Then, when they are in financial difficulty, usually due to temporary unemployment, divorce, or uninsured medical expenses, they try to handle their problems without any help and without a feasible plan. They may do things, such as take money out of a retirement account (which cannot otherwise be touched by creditors) to pay bills, giving up an exempt asset to pay a creditor.

If you find yourself in that situation, you should consider a number of things. First, you should consult a qualified professional who can give you advice and counsel about your financial situation.

Next, if you are still leery of considering bankruptcy as an option, remember that bankruptcy is not a new thing. Bankruptcy is mentioned in the Bible (Old Testament), and was included by our ancestors when they wrote the United States Constitution in 1787. Many prominent individuals have filed bankruptcy, from state governors to former baseball commissioners to entertainers.

Many companies have used the bankruptcy process seemingly as a part of their "regular business practices" - using bankruptcy filings to void contracts the company does not like, including union contracts, to rid themselves of pension obligations, and otherwise restructure their finances. Some airlines have been in and out of bankruptcy several times. Surely you are entitled to consider bankruptcy as well, without any feeling of guilt.

There are five types of bankruptcies for U.S. debtors, but most people need only consider two types. Of the three types that most individuals do not need to consider, Chapter 9 is a bankruptcy for governmental units, such as cities and counties. Chapter 11 is a reorganization bankruptcy, usually for medium to large businesses. The filing fees and other costs are high and legal and accounting fees can be enormous. It is not appropriate for most individuals. Chapter 12 is for family farmers and only farmers qualify.

Eliminating the first three types leaves you to consider Chapter 7 liquidation or Chapter 13 reorganization (for a person with a regular source of income).

In a Chapter 7, you list all your assets and liabilities, apply the exemption laws to your property so that you can keep some or all of your property, and then you discharge (do not have to pay) your unsecured debts and you move on with life. There are exceptions of course (for example, some debts are not dischargeable).

In a Chapter 13 bankruptcy, you list your assets and liabilities and your reasonable expenses and income. You propose a plan of reorganization through which you pay creditors some or all of the money owed them over a period of from 36 to 60 months. Then assuming you satisfied all other requirements, you discharge (do not have to pay) the unsecured debts dealt with in the plan. There are a number of good reasons why you might choose a Chapter 13 instead of a Chapter 7 plan.

What Happens to Debts Secured by Collateral?

If you have a debt secured by collateral, such as a debt used to finance a car or a home, you have at least three options:

1. You can surrender the collateral and owe nothing further;
2. You can redeem the collateral by paying the creditor the value of the collateral. This is most often used in car loans, where the loan is substantially more than the car is worth (sometimes referred to as being "upside down" on the car).
3. You can reaffirm the loan and retain the collateral. Both the creditor and the debtor must agree on the terms of the reaffirmation; some creditors will agree to reduce interest rate or reduce principle on the reaffirmed loan.