While there may still be a sliver of a stigma associated with bankruptcy, the most recent economic downturn has helped create a view of it as a strategy to rise above an almost impossible situation.
From job loss and cutbacks to medical bills and divorce, life happens to us all. Every year, over a million people at various stages of life file for bankruptcy. The list of notable filers includes Presidents Abraham Lincoln, Ulysses S. Grant and Thomas Jefferson; major companies such as Chrysler, General Motors, Chuck E. Cheese's, Delta Airlines, K-Mart, Perkins Restaurant and United Airlines; and even famous folks such as Donald Trump, Walt Disney, Larry King, Mike Tyson and Toni Braxton.
Bankruptcy has come a long way from years ago when debtors were subject to punishment such as "debtor's prisons" or the removal of an ear. Laws have changed, morphed and developed into a more civilized set of regulations. Yes, there is life afterwards.
The right to file bankruptcy is firmly embedded in the Constitution, which directs Congress "to establish uniform Laws on the subject of bankruptcies throughout the United States." Driven by federal law, there are state differences in exemptions. These laws, which are located in Title 11 of the United States Code, account for the various types of bankruptcies available such as chapters 7, 11 or 13. We will discuss the variations in detail over the next few weeks. Right now, we're zeroed in on the basics of bankruptcy.
Effect on credit
A bankruptcy may stay on your record for 7 to 10 years and will drop your credit score initially. Bankruptcy will not destroy your credit. Not paying your bills timely has probably resulted in a poor credit score. Still, if planned properly, a debtor can rebuild and establish a better credit history. In a Chapter 13 bankruptcy, by making consistent payments, the debtor's credibility to pay is reinforced to brokers and lenders. After a Chapter 7, by gaining control of finances, the debtor is in a better position to rebuild credit. Within a short period of time, the debtor may be able to purchase a home or car.
Bankruptcy provides a fresh start in many situations. However, some debt typically cannot be discharged. A few of those debts include: child support, alimony, most taxes, student loans, criminal fines, and judgments for injury or death.
The bankruptcy process
All bankruptcy filings begin with a petition. This petition includes information about your finances such as a detailed listing of your assets, liabilities, current income, contracts and/or leases. Once your petition has been filed, you will be granted an automatic stay, which means that your creditors can no longer attempt to collect from you.
The day that your bankruptcy is filed, you are granted the stay, thus the title "automatic stay." This means no more phone calls, letters, liens, garnishments, repossessions or foreclosures once you let your creditors know that you have filed bankruptcy. All activity should stop. The automatic stay is not permanent. To maintain the stay, the debtor must now abide by the plan established by the court and remain current on payments moving forward.
The bankruptcy trustee plays a major role in bankruptcy proceedings. The trustee – an officer of the court – oversees the process for the unsecured creditors. The role of the trustee is to approve a debt discharge or repayment plan that resolves debt problems in an orderly fashion.
In Chapter 7, the trustee has an immense amount of power. Per the law, the trustee can take ownership and control of the debtor's nonexempt assets. The trustee will then analyze them to determine whether to leave the assets with the debtor or sell them to satisfy debts.
In Chapter 13, the trustee still oversees the process. However the trustee is typically collecting the monthly payments and sending them to creditors.
Meeting of creditors
Whether you are filing a Chapter 7 or Chapter 13, it will be necessary for the debtor to attend a brief hearing before the trustee. This hearing is very professional, organized and designed to verify under oath what is in the petition. Although creditors are free to attend, they usually do not. So do not think that creditors will be in the room to personally harass you. Typically, the trustee, debtor and attorney will be the only ones present.
Next week: Chapter 7, the details.