Rebecca Wilder, the pen name for an "economist working in the financial services industry in Boston, MA," had this headline in a December 28, 2009 newsneconomics.com article: "The Hottest Trend in 2009: Declaring Bankruptcy".
Jane Bryant Quinn kicked off the New Year with these comments in the January 12, 2009 issue of Newsweek: "Go bankrupt in 2009. If you're reaching the end of your rope, don't try to hold on. Save what you can."
Either these commentators know their stuff, or a lot of people are following their advice. A June 3, 2009 USA Today article reported that consumer and commercial bankruptcy filings are on a pace to "reach a stunning 1.5 million this year, according to a report from Automated Access to Court Electronic Records...In May, the number of bankruptcy filings reached 6,020 a day, up from 5,854 in April."
This is sobering information, especially in light of legislative reforms enacted in 2005 that made it more difficult to use bankruptcy as a legal procedure to erase debts. And while most of the increase in filings is due to the financial distress inflicted by a struggling economy, a change in attitude may also be a factor.
Some may now see bankruptcy as a preemptive measure rather than an act of last resort. Quoting Bryant: "The right time to go bankrupt is when you're financially stuck but still have assets to protect." As more people file for bankruptcy, the social stigma diminishes, individuals are taking a closer look at the legal and financial merits of a bankruptcy filing.
An Overview of Bankruptcy
Bankruptcy has a long history, going back to ancient times, because there have always been people who find themselves unable to pay their debts. While not an ideal solution, the process of bankruptcy provides a structure for resolving this dilemma, for both debtors and creditors.
The word bankruptcy comes from the Latin bancus, the tradesman's counter, and ruptus, broken. (In Rome at the time of the Caesars, a merchant or tradesman unable to pay his debts would have his bench in the market place either broken or removed by a court-appointed official, who would then auction off the bankrupt person's property to the highest bidder.)
The first English bankruptcy law was passed in England in the late 1500s during the rein of Henry VIII, and provided the foundation for basis for bankruptcy laws in the United States. Under both Roman and English law, bankruptcy was not something an individual chose; rather it was forced upon them by their creditors. Besides the seizing of assets, creditors could continue to demand repayment of all outstanding debts. If the debtor failed to repay, some laws allowed for imprisonment and even physical punishment.
Today, there are two basic forms of court-authorized bankruptcy: liquidation or reorganization. In the US, liquidation is known as Chapter 7 Bankruptcy, which refers to the chapter of the bankruptcy law that allows your assets to be sold off. Reorganization bankruptcies can fall under Chapters 11, 12 and 13, with 13 applying to most individuals. Chrysler and General Motors both filed under Chapter 11. When you file for bankruptcy, the court prohibits your creditors from taking action to collect debts without the approval of the court.
Chapter 7 - Liquidation
In a liquidation bankruptcy, you put your personal property in the hands of the bankruptcy court, which sells it and uses the proceeds to pay your debts (or as much of your debt as possible). Once the process is completed, old creditors have no further claim of payment, but the bankruptcy stays on your credit history for 10 years, which may result in restriction or denial if you attempt to borrow money during that time.
Under the new law passed in 2005, you may not have the choice of filing a Chapter 7 liquidation bankruptcy. If your income exceeds the median income for the same size family in your state you must submit to a bankruptcy means assessment. This test essentially establishes a budget for you, based on a minimum standard of living. If after imposing this budget, the court believes that you have $100 or more per month in disposable income that you could apply towards your debt repayment, you may be pushed into a repayment plan under Chapter 13 instead of qualifying for Chapter 7.
Chapter 11, 12 or 13 - Reorganization
In any reorganization bankruptcy, the filer submits a repayment proposal to the bankruptcy court. Payment plans usually cover three to five years, and not all debts receive equal treatment. The law requires that some debts must be repaid in full, while others may require a percentage, and some may not be repaid at all.
There are some debts that cannot be discharged or "forgiven." These include debts you forget to list in your bankruptcy papers, child support and alimony, most student loans, fines and penalties as a result of breaking the law, tax debts, and judgments for personal injury or death caused by driving while intoxicated.
During the repayment period, the court will place restrictions on how you can spend money. In many cases, wages will be garnished by a trustee of the court, who will make the payments to your creditors.
Provided you make your payments as promised, it is possible that creditors will grant you credit at the end of the repayment period. But the bankruptcy will stay on your credit history for six years.
Jane Bryant Quinn kicked off the New Year with these comments in the January 12, 2009 issue of Newsweek: "Go bankrupt in 2009. If you're reaching the end of your rope, don't try to hold on. Save what you can."
Either these commentators know their stuff, or a lot of people are following their advice. A June 3, 2009 USA Today article reported that consumer and commercial bankruptcy filings are on a pace to "reach a stunning 1.5 million this year, according to a report from Automated Access to Court Electronic Records...In May, the number of bankruptcy filings reached 6,020 a day, up from 5,854 in April."
This is sobering information, especially in light of legislative reforms enacted in 2005 that made it more difficult to use bankruptcy as a legal procedure to erase debts. And while most of the increase in filings is due to the financial distress inflicted by a struggling economy, a change in attitude may also be a factor.
Some may now see bankruptcy as a preemptive measure rather than an act of last resort. Quoting Bryant: "The right time to go bankrupt is when you're financially stuck but still have assets to protect." As more people file for bankruptcy, the social stigma diminishes, individuals are taking a closer look at the legal and financial merits of a bankruptcy filing.
An Overview of Bankruptcy
Bankruptcy has a long history, going back to ancient times, because there have always been people who find themselves unable to pay their debts. While not an ideal solution, the process of bankruptcy provides a structure for resolving this dilemma, for both debtors and creditors.
The word bankruptcy comes from the Latin bancus, the tradesman's counter, and ruptus, broken. (In Rome at the time of the Caesars, a merchant or tradesman unable to pay his debts would have his bench in the market place either broken or removed by a court-appointed official, who would then auction off the bankrupt person's property to the highest bidder.)
The first English bankruptcy law was passed in England in the late 1500s during the rein of Henry VIII, and provided the foundation for basis for bankruptcy laws in the United States. Under both Roman and English law, bankruptcy was not something an individual chose; rather it was forced upon them by their creditors. Besides the seizing of assets, creditors could continue to demand repayment of all outstanding debts. If the debtor failed to repay, some laws allowed for imprisonment and even physical punishment.
Today, there are two basic forms of court-authorized bankruptcy: liquidation or reorganization. In the US, liquidation is known as Chapter 7 Bankruptcy, which refers to the chapter of the bankruptcy law that allows your assets to be sold off. Reorganization bankruptcies can fall under Chapters 11, 12 and 13, with 13 applying to most individuals. Chrysler and General Motors both filed under Chapter 11. When you file for bankruptcy, the court prohibits your creditors from taking action to collect debts without the approval of the court.
Chapter 7 - Liquidation
In a liquidation bankruptcy, you put your personal property in the hands of the bankruptcy court, which sells it and uses the proceeds to pay your debts (or as much of your debt as possible). Once the process is completed, old creditors have no further claim of payment, but the bankruptcy stays on your credit history for 10 years, which may result in restriction or denial if you attempt to borrow money during that time.
Under the new law passed in 2005, you may not have the choice of filing a Chapter 7 liquidation bankruptcy. If your income exceeds the median income for the same size family in your state you must submit to a bankruptcy means assessment. This test essentially establishes a budget for you, based on a minimum standard of living. If after imposing this budget, the court believes that you have $100 or more per month in disposable income that you could apply towards your debt repayment, you may be pushed into a repayment plan under Chapter 13 instead of qualifying for Chapter 7.
Chapter 11, 12 or 13 - Reorganization
In any reorganization bankruptcy, the filer submits a repayment proposal to the bankruptcy court. Payment plans usually cover three to five years, and not all debts receive equal treatment. The law requires that some debts must be repaid in full, while others may require a percentage, and some may not be repaid at all.
There are some debts that cannot be discharged or "forgiven." These include debts you forget to list in your bankruptcy papers, child support and alimony, most student loans, fines and penalties as a result of breaking the law, tax debts, and judgments for personal injury or death caused by driving while intoxicated.
During the repayment period, the court will place restrictions on how you can spend money. In many cases, wages will be garnished by a trustee of the court, who will make the payments to your creditors.
Provided you make your payments as promised, it is possible that creditors will grant you credit at the end of the repayment period. But the bankruptcy will stay on your credit history for six years.
