Bankruptcies not a cure-all
TERRY SAVAGE firstname.lastname@example.org Jun 9, 2008
Traders work on the floor of the New York Stock Exchange. Market analyst Jim Stack (inset) said at a recent conference that the recession cycle is aging and that we're likely near the end.
Updated: May 3, 2013 12:14PM
It's an epidemic. An astounding 91,214 Americans declared bankruptcy in May -- up 31 percent from a year ago. More than 1 million Americans are expected to declare bankruptcy this year -- up nearly 50 percent from last year, according to the American Bankruptcy Institute. That means at least one in every 100 families will be affected by a bankruptcy!
It's a sign of the times -- a combination of the housing and mortgage crisis, consumer debt burdens, and the strains that rising energy prices are putting on household budgets.
In the first quarter of 2008, 516,000 new foreclosure proceedings were started. And the delinquency rate (homes with at least one payment past due, but not yet in foreclosure) for single-family mortgages is now 6.35 percent, the highest in modern times.
Americans are now carrying $975 BILLION in credit card debt -- a nearly 20 percent increase in the past two years. About half of all cardholders carry a balance, instead of paying in full every month.
The national average for interest rates on credit card debt is 12.38 percent (according to www.indexcreditcards.com). Yet many cardholders are paying "default rates" as high as 31.99 percent, applied to people who are late on payments or over the limit.
The sharp increase in the unemployment rate to 5.5 percent in May, along with the loss of 66,000 private-sector jobs, is a clear indication that more people will have more trouble paying their bills. The economic situation grows more dire daily.
Bankruptcy beckons as a quick way out of trouble. But if you don't understand the new rules, and the two consumer bankruptcy codes -- Chapter 7 and Chapter 13 -- you could be creating even more problems than you resolve.
The Savage Truth
Here are some of the facts you need to understand, and some resources to help you make this important decision. But before you consider filing for bankruptcy, you should know that no matter which route you take, a bankruptcy does not simply "wipe the slate clean."
Although we don't have debtors' prisons in America, there are some debts you cannot escape. During the bankruptcy filing your creditors cannot take actions to collect on your debts. But once the bankruptcy plan is "confirmed" by a judge you will still face repayment on several types of debt.
Student loans, for example, are not canceled by filing bankruptcy -- though repayments can be postponed (while the interest continues to accrue). In fact, there are easier ways than bankruptcy to defer student loans if you're in a "hardship" position.
Mortgage foreclosure can't be eliminated through a filing for bankruptcy -- but filing will "stay" the process -- until the bankruptcy is confirmed. Then any creditors who have a "secured interest" in your property can move to foreclose, unless your bankruptcy plan has created an agreement to pay your past due amounts. And filing bankruptcy may not stop a tenant eviction from a rental property.
Most back taxes cannot be erased by a bankruptcy, nor can obligations to pay child support. So if you think bankruptcy is the "easy way out," you might be surprised. In fact, the bankruptcy law was changed in October 2005 to make it more difficult to simply default on the amounts you owe. It pays to understand the new law, and there are several new books that are designed to explain it to you. Among those to consider:
Personal Bankruptcy Laws for Dummies (2nd edition) by James Caher, (Wiley, $19.99)
The New Bankruptcy: Will it Work for You? By Stephen Elias, (Nolo, $21.99)
American Bar Association Guide to Credit & Bankruptcy by David Hudson, Jr. (Random House, $16.95)
It pays to spend time reading about bankruptcy before you consult an attorney, so you can make the right choices. Many attorneys want to file the comparatively quick and easy Chapter 7 bankruptcy (if the client qualifies) because they can collect their fee and be done with the process. But while Chapter 13 takes more complex legal work, it might be a better solution for the client.
CHAPTER 7 of the bankruptcy code simply allows you to write off or escape your debts -- except those noted above. It is a relatively quick process, and shouldn't take more than a few months. But in Chapter 7, you lose all your major assets, with the exception of some exempt necessities. A Chapter 7 bankruptcy will stay on your credit report for 10 years.
Under the new law, you have to "qualify" to file a Chapter 7 bankruptcy. You'll have to file documents including your most recent income tax return and wage stubs. If you have a certain level of income, which demonstrates your ability to repay even a portion of your debts, you'll be required to file Chapter 13. And that may not be a bad idea.
CHAPTER 13 requires you and your attorney to work with the court, your creditors, and the bankruptcy trustee assigned to your case to present a repayment plan that is satisfactory to all concerned. You have a period of from 3 to 5 years to make these agreed upon payments, which are monitored by the trustee.
The idea of Chapter 13 is to give you some breathing room, and an opportunity to repay at least a portion of your obligations. And it may let you keep your most important assets, such as your home or your car. This type of bankruptcy will stay on your credit report for seven years. During the period of repayment, your creditors cannot file additional negative items on your credit report.
There's one more important thing to note about taking the Chapter 13 route: It is flexible. If you can't keep up the plan, perhaps because of job loss or illness, you can ask the judge to modify it. Or you can later decide to file Chapter 7. But if you successfully complete the Chapter 13 plan, you get the satisfaction of knowing that you lived up to your revised obligations.
Given the state of the economy, it's likely that someone you know is already considering bankruptcy as a solution to debt woes. Taking the time to understand the processes and the consequences of filing for bankruptcy will make it easier. And that's The Savage Truth.
MORE ONLINEUP TO THE MINUTERead Terry Savage's blog at suntimes.com.