Bankruptcy Law 101
LawsOnline
March 01, 2024
The word 'bankruptcy' is weighted down with dark, heavy descriptors such as defeated, destitute, and derelict. However, it is not 'the end of the world' to declare bankruptcy. Instead, it's a clean slate to start anew and follow a different path, or an insightful energized renewal of your commitment and determination to succeed.
According to statistics released by the Administrative Office of the U.S. Courts on behalf of the Federal Judiciary, "Total bankruptcy filings rose 16.8 percent" and "annual bankruptcy filings totaled 452,990 in the year ending December 2023, compared with 387,721 cases in the previous year." (please see https://www.uscourts.gov/news/2024/01/26/bankruptcy-filings-rise-168-percent)
"Despite the recent increases, the newest totals remain far lower than in December 2010, when filings peaked at just less than 1.6 million" due to the combined factors of high household debt and rising mortgage costs. (please see American Bankruptcy Institute) Surprisingly, even though the pandemic caused great economical change, the incidence of bankruptcy was drastically reduced when COVID emerged in 2020.
What is bankruptcy?
For most people, bankruptcy is a way to get a fresh start after acquiring too much debt. Most individuals who file for bankruptcy will file under Chapter 7 or Chapter 13. Depending on which is filed, one may get most of their debt erased or work out a solution with lenders to pay off existing debt.
Are bankruptcy laws determined by Federal or State government?
Bankruptcy laws are made by the Federal government. States can pass laws that protect the "lender and debtor relationship" but they cannot regulate how a bankruptcy is processed or if it is to be granted.
Can all debts be erased?
No. Whichever type of bankruptcy is filed, there are certain debts that cannot be erased at all. These include alimony, child support, most student loans and legal judgments against fraud or criminal negligence such as a drunk driving accident. Some taxes may be erased, but not all. In fact, taxes have their own set of bankruptcy rules.
Do I need a lawyer?
When filing for bankruptcy it is important to find a bankruptcy lawyer who can help you navigate the process. Bankruptcy lawyers specialize in this area of law and are familiar with the distinct differences and effects of the process; they can be your greatest ally in a tough, seemingly bureaucratic system.
How long will bankruptcy affect my credit?
Bankruptcy will stay on your credit report for 10 years. There are ways to improve your credit rating and make yourself more appealing to lenders. (please see https://lifeafterbankruptcy.com) It is not an easy road back and those filing for bankruptcy should have a realistic expectation to work hard at their future spending practices.
Do I have to do debt counseling?
Yes. Under an October 2005 bankruptcy act, it is required that all persons applying for bankruptcy meet with a government qualified debt counselor first. After one has successfully filed for bankruptcy, the debtor must again meet with a counselor before the bankruptcy file will be closed.
What is Chapter 7 bankruptcy? (In a nutshell)
Chapter 7 bankruptcy is also known as a "liquidation of debt." A person can file for Chapter 7 every 8 years. This usually involves the liquidation of property to pay back debts. An appointed trustee sells all secured, non-exempt property for the debtor and distributes money raised among the lenders. Unsecured debts, such as credit card bills and most medical bills can be erased. This may mean the loss of secured debts such as a home. However, most states do have protections in place for debtors to insure they may keep life necessities such as clothing and some furniture. Retirement funds such as IRA's are also protected and debtors may keep these as well. After the changes to bankruptcy law in October 2005, many debtors did not get approved for Chapter 7 and were required instead to apply for Chapter 13. In short, if you still have an income and make more than the median for a household of your size in your state, you may have to file for Chapter 13. To find out if you should be filing for Chapter 7 or Chapter 13, you can use a means test calculator. (please see https://www.legalconsumer.com/bankruptcy/means-test/) Again, this is where consulting a lawyer becomes very important.
What is Chapter 13 bankruptcy? (In a nutshell)
Chapter 13 bankruptcy is also known as a "reorganization of debt" or the "wage earners' plan." One can file for Chapter 13 more often as long as any previous filings are already closed. This is the bankruptcy for those trying to a find a way to get out of debt but still expect to pay off some of their debt. Generally speaking, if you still have a source of income and could make payments, just not the high ones you have now, you can be restructured into a debt payment plan under Chapter 13. This is the most likely to be used to try to stop a mortgage foreclosure. In this scenario, you can keep the house, car and more than you could under Chapter 7. There are limits to the amount of debt that can be restructured. If one is above those limits they would file under Chapter 11, however, the average American is not in this category.
MORE RESOURCES
US Department of Justice - US Trustee Program
A complete listing of approved credit counseling agencies is available (state-by-state):
www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm
A complete listing of approved providers of financial management instructional courses (state-by-state):
www.usdoj.gov/ust/eo/bapcpa/ccde/de_approved.htm
American Bankruptcy Institute
The American Bankruptcy Institute is the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
www.govtrack.us/congress/bill.xpd?bill=s109-256
American Bar Association
The American Bar Association provides the pros and cons of bankruptcy and the answers to common questions that are needed to make an informed decision.
Laws Online
Our mission is to present to the Internet community an easy-to-use site in which to search for law firms and individual lawyers.
Life After Bankruptcy
On this website you'll discover everything you need to recover quickly...and many other bankruptcy recovery and credit repair strategies you'll find nowhere else.
NOLO Bankruptcy Library
Nolo is your legal companion, empowering you and saving you money whenever the law touches your work, life or finances.
US Courts - Bankruptcy Basics
www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics
Bankruptcy Basics provides basic information to debtors, creditors, court personnel, the media, and the general public on different aspects of the federal bankruptcy laws.
What can you do to prevent Bankruptcy?
Photo by Karolina Grabowska from Pexels.com.
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