Life Advice
Bankruptcy
Each year more than 1,200,000 Americans file for protection under the federal bankruptcy laws, according to the American Bankruptcy Institute. Some are credit abusers or are financially irresponsible. But average working families who try to pay all of their bills can find themselves in financial trouble, too. The sudden loss of a job, medical bills, a divorce or even a natural disaster can quickly wipe out a life’s savings. For many, bankruptcy provides a second financial chance.
Bankruptcy is usually used as a last resort, after other attempts to solve a financial crisis fail. You may want to talk with a credit counselor or an attorney to see if you really need to file bankruptcy, or if an agreement can be reached with your creditors.
What Is It?
Bankruptcy can relieve the honest but unfortunate debtor from the pressures of excessive debt by providing a fresh start. It allows you to discharge some of your debt or allows you time to get back on your feet without harassment by creditors. The bankruptcy laws also benefit creditors by providing a method for them to obtain at least partial payment of a debt in an orderly fashion.
For many, making the decision to file for bankruptcy is difficult. You may think bankruptcy is a sign of failure and an indication that you can’t manage your own affairs. In truth, most people who file for bankruptcy intend to pay their bills but can’t. By filing for bankruptcy, you can start again with a clean slate, free of the stress and depression that result from being just one step ahead of the bill collector.
At the same time, the decision to file bankruptcy should be carefully considered. It is a Federal court proceeding which can affect your legal right to keep or to use your property. Once you start a bankruptcy case, it may be impossible to stop.
There are two main types of bankruptcy available to individuals. In Chapter 7, your nonexempt assets may be sold to pay creditors while most of your debts are discharged. In Chapter 13 or Chapter 11, you prepare a reorganization plan to pay off creditors in full or in part. Once you file a bankruptcy petition, an automatic stay prevents creditors from starting or continuing most legal proceedings against you.
Repaying Debts
Chapter 7
In Chapter 7 bankruptcy, your nonexempt property may be sold by an appointed trustee, who then makes partial payments to your creditors. You have the right to retain at least a partial interest in certain assets, such as your residence, car, clothing, household appliances and furnishings, life insurance, pensions and tools of your trade. In most cases, you may not have to give up any of your personal property. You may usually choose either the exemptions provided for in the Bankruptcy Code or those allowed under your state law, whichever is most beneficial. Creditors do retain the right to any collateral you have pledged to secure a loan.
The first step in bankruptcy is to file a petition and schedules at the clerk’s office of the federal bankruptcy court. Your petition must include a list of all creditors, the sources of your income, a list of all real and personal property, and a detailed list of your living expenses. Some of the documents you will need include the following:
| Deeds, mortgages, contracts on your home and mortgage statements. | |
| Any papers relating to past bankruptcies. | |
| Copies of tax returns for the past two years. | |
| All legal papers, summonses, complaints and notices of attachment, execution or garnishment. | |
| Credit card bills, medical bills and any other documents regarding outstanding debt. | |
| Statements and passbooks for savings and checking accounts for the past year. | |
| Student loan papers. |
You can obtain the forms to file for bankruptcy from the court clerk. You’ll find the number of the local bankruptcy court in the federal government listings in the white pages of your phone book. You must pay the appropriate fee (about $175) at the time you file your petition. Under certain circumstances, the court may allow you to pay the fee in installments. A few courts permit the fee to be waived if you are indigent.
In all but the most basic of cases, it is usually advisable to hire an attorney. Fees may range from $400 to $1,000 or more, depending on the complexity of your case. Be sure to discuss attorney fees up front and ask whether you can pay in installments.
In a straightforward proceeding, the entire procedure usually takes four to six months. You can file for Chapter 7 bankruptcy only once every six years, and notice of the filing will usually remain on your credit report for up to 10 years. Also note that, although your debt may be discharged, anyone who has co-signed a loan with you will remain responsible even after your bankruptcy.
Chapter 11
Chapter 11 bankruptcy is generally used to reorganize a business, although individuals are also eligible. This type of bankruptcy allows a business to continue operating while repaying creditors through a court-approved plan.
Chapter 13
If you have a regular income, Chapter 13 bankruptcy provides a method for repaying your debt over a period of time, according to a court-approved plan. The period of time allowed ranges from three to five years. Generally, only an individual with unsecured debts of less than $270,000 and secured debts of less than $800,000 is eligible.
To file Chapter 13, you must file the appropriate schedules and petitions with the bankruptcy court and pay the filing fee. You must also file a proposed plan of repayment with your original petition or within the next 15 days. A trustee will be appointed to supervise your performance, to make regular payments to your creditors and to provide the court and other parties with information about your finances.
Nondischargeable Debts
Certain debts cannot be discharged through a bankruptcy proceeding. These include certain taxes, alimony and child support, student loans and some property settlements. Other nondischargeable debts result from fraud, willful or malicious injury, certain fines or penalties, and claims incurred from driving under the influence of alcohol or drugs.
Will It Ever End?
A bankruptcy filing generally will stay on your credit record for up to 10 years, but it need not be a permanent handicap. In fact, there are laws that forbid discrimination against persons who have declared bankruptcy. For example, you may not be denied a job, be denied or evicted from public housing or be denied a driver’s license just because you filed for bankruptcy.
The emotional impact on you and your family may take some time to heal. You may want to seek emotional support by contacting a professional counselor or clergy member or discussing your problems with a friend or family member.
Making a Fresh Start
Bankruptcy has indeed tarnished your credit report, but it is still possible to gain renewed confidence from creditors. You can typically obtain credit if you demonstrate a consistent employment record and signs of financial rehabilitation. Start by opening a savings account and obtaining a secured credit card. Make the payments on time to build a positive credit profile.
During your rebuilding period, it is important to check your credit rating often to make sure you are getting credit for your good deeds. Credit bureaus are required to provide a free copy of your credit report if you are denied credit. Some credit bureaus also provide a free copy once a year. Be prepared to provide relevant information, including your Social Security number, date of birth and addresses for the past five years. Contact the following companies to order a copy of your credit report:
Experian
P.O. Box 2104
Allen, TX 75013
1-888/397-3742
Trans Union
P.O. Box 1000
Chester, PA 19022
1-800/888-4213
CBI/Equifax
P.O. Box 740241
Atlanta, GA 30374
1-800/562-4437
Once you receive your credit report, look it over carefully. Are your name, address and Social Security number correct? Do the lines of credit listed belong to you? If you find errors, notify the credit bureaus in writing and include any backup materials such as canceled checks.
A Final Word
Again, before declaring bankruptcy you may want to seek credit counseling or talk with an attorney and try to reach out-of-court agreements with your creditors. For more information see the Life Advice® pamphlet Having Credit Problems.
For More Information
REFERENCE MATERIALS
How to Bounce Back from Bankruptcy $15.95
Paula Langguth Ryan, Pellingham Casper Communications
To order, call 800/507-9244.
How to File for Bankruptcy
Stephen Elias, Albin Renauer and Robin Leonard
Life Advice® readers save up to 40% on the purchase of Nolo products by calling 1/800-728-3555 and mentioning DMET or visit www.nolo.com.
Bankruptcy Overview $20.00
To order this 60-page book, write the American Bankruptcy Institute, 44 Canal Center Plaza, Suite 404, Alexandria, VA 22314-1592, or call 703/739-0800.
Surviving Debt, A Guide for Consumers $17.00
National Consumer Law Center
To order, call 617/523-8089 or visit www.consumerlaw.org.
The Consumer Handbook To Credit Protection Laws can help you understand credit protection laws and how they can help you. Available free. So if you’re worried about your credit rating or need some information about restoring your credit, contact:
Publications Services, Board of Governors
Federal Reserve System, MS-138
Washington, DC 20551
202/452-3244
PAMPHLETS FROM THE FEDERAL GOVERNMENT
The quarterly Consumer Information Center catalog lists more than 200 helpful federal publications. For your free copy, write: Consumer Information Catalog, Pueblo, CO 81009, call 1-888/8-PUEBLO, or find the catalog on the Net at www.pueblo.gsa.gov.
ADDITIONAL SOURCES
You can also check the American Bankruptcy Institute’s home page on the World Wide Web, www.abiworld.org, which contains information on alternatives to bankruptcy as well as dozens of links to other helpful internet sites.
RELATED LIFE ADVICE® PAMPHLETS
See other Life Advice® pamphlets on related topics: Being Sued, Building Financial Freedom, Choosing a Financial Advisor, Choosing an Attorney, Creating a Budget, Having Credit Problems, and Taking Legal Action. To order, call 1-800/Met-Life, that’s 1-800/638-5433.
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