This article comes from Michael, a contributing editor of the Dough Roller, a personal finance and investing blog.
According to the US Bankruptcy Courts, 1,042,806 bankruptcy cases were filed in 2009. This is a whopping 187 less than the 1,042,993 cases that were filed in 2008. Ok, so that’s not much of an improvement at all, but considering the economic turmoil that this country has seen in the last 14 months, it’s somewhat surprising.
Bankruptcy has changed immensely in the last few years, mostly to the benefit of creditors. Previously, individuals use to be able to simply file for bankruptcy and rid themselves of all financial responsibility. That is no longer the case. In 2004, close to 2 million bankruptcy cases were filed as people were going on spending sprees, then claiming they could not afford to meet their responsibilities. That is no longer the case, and it’s important for both consumers and businesses to understand the differences in bankruptcy laws and chapters. There are four major ways to file for bankruptcy:
This form of bankruptcy continues to be the most popular for US citizens. 67% of all bankruptcy filings since 2000 have been Chapter 7. When you file, you are essentially asking to start over. Chapter 7 requires a court trustee to be assigned to liquidate all available assets. This means that most possessions are sold to pay off current debts. Certain possessions, such as your house and your clothes, are usually spared and not all debts are forgiven. If a certain debt is not forgiven, you cannot claim it in another bankruptcy filing. You cannot file another Chapter 7 bankruptcy for at least 7 years after your first bankruptcy filing. It should be noted that certain debts such as alimony, taxes, child support and student loans (most of the time) cannot be forgiven.
The other common form of personal bankruptcy lies with Chapter 13 where the debtor is once again assigned a trustee. However, the job of the trustee is now to formulate a repayment plan. Assets do not have to be sold off in this case and only a portion of the overall debt needs to be paid. In most cases, you can negotiate with your creditors to pay $0.10 or $0.20 on the dollar. To apply for Chapter 13, you must have a reliable income, and have less than $269,250 in unsecured debt and less than $807,750 in secured debt. How these figures were generated is beyond me!
“Filing Chapter 11” is a phrase often used to describe declaring bankruptcy. But the truth is, Chapter 11 is actually an uncommon way to file personal bankruptcy. Originally used specifically for businesses, individuals can now file for Chapter 11 bankruptcy. Chapter 11 is similar to Chapter 13 bankruptcy – the only major difference is that there are no secured and unsecured limits owed by the debtor.
An extremely rare form of bankruptcy, Chapter 12 is again similar to Chapter 13, however it’s specific to family farmers. Less than 1/10 of 1% of bankruptcies are filed this way, so unless you spend your days tilling the land, this form of bankruptcy will not apply to you.
If you’re wondering why someone would file for Chapter 7 before Chapter 13 or 11, there’s a pretty good chance that their payments are well beyond repayment and they are truly without the means of even re-structuring their debt. Credit cards, student loans, mortgages, and other means of credit can be extremely dangerous if not used properly. If you absolutely have no other way to get yourself out of debt, filing for bankruptcy can be a fairly inexpensive option to restructure your life (court fees usually total around $300). Know that if you do file, your credit report will reflect your decision for up to 10 years, your credit score will suffer, and your savings or checking account will be your only means of money for a long while.