To File or Not to File

How Bad is Your Debt? Does Filing for Bankruptcy Make Sense For you?

It’s not easy. It seems like your whole world is crashing around you. Is your life in financial chaos? Is it now affecting relationships with those that you care about? Do you find it difficult to sleep at night…can you even remember the last time you had a good night’s sleep? Constantly worried?

You may have late notices coming to your mailbox everyday, or maybe your mortgage company keeps calling. Or maybe you have collection agencies calling saying you owe them money, and if you don’t pay, they’re coming after you.

There comes a point when a person simply says, "I can’t take this anymore! Will there be no relief for me?" Well, yes, there is relief for such financial crunches, and you’ve probably heard about one option: bankruptcy. It’s a word that gets thrown around a lot, and many don’t really understand what it means, what’s involved and whether it’s the right move.

The term bankruptcy comes from the two Italian words "banca rotta." In medieval Italy, if a merchant owed someone else a debt and didn’t pay, his creditors often got together and broke his trading table. Later, in England, you could be put in jail and even hanged for owing money. The United States adopted the original bankruptcy laws of England, so even the U.S. had debtor’s prisons (State Supreme Court Justice of Rhode Island William West was put in one).

Fast forward: After a hodge-podge of laws dealing with bankruptcies, government started to believe that a fairer and more modern way to deal with debt should be implemented. In 1898, Congress set up the Bankruptcy Act, which gave more protections to creditors. This law was the basis of our current bankruptcy law.

For our purposes, there are 3 main types of bankruptcy that are important. These are called "Chapters," so called because each falls under a different chapter of the U.S. Bankruptcy Code: Chapter 7, Chapter 11 and Chapter 13.

Chapter 7, also known as "personal bankruptcy," "straight bankruptcy" or "liquidation bankruptcy," is the most common type, especially for individuals. Most of a person’s debts can be eliminated or "discharged" under Chapter 7, as well as stopping anyone from continuing to try to collect debt. Chapter 7 is designed to give the individual a fresh start in their financial life. Know that not all debts can be eliminated—for example, student loans, tax liens and domestic support obligations.

A chapter 7 case is started by filing a petition with the bankruptcy court, which can be filed voluntarily by an individual or by a husband and wife jointly. The filing of a petition creates the "bankruptcy estate" and with it the "automatic stay", where the person filing is protected from most creditors going after them. Chapter 7 bankruptcies stay on the debtor’s credit report for 10 years.

Chapter 11 is mainly for businesses that wish to reorganize, but it is also available to individuals. The philosophy behind Chapter 11 is that sometimes it’s better to allow a financially troubled business to try to reorganize its debt and continue to operate rather than liquidate everything. The franchise chain 7-Eleven is a good case in point—the company came out of a Chapter 11 bankruptcy in 1991, and today is the top franchise in the country.

While Chapter 11 is a reorganization used mostly by businesses, Chapter 13 can be considered the "individual’s reorganization." Chapter 13 requires a debtor to come up with a plan where he or she can keep property that might otherwise be lost—like a car or mortgaged home. The plan must be approved by the bankruptcy court and is supervised by the bankruptcy trustee. Usually the plan allows for a debtor to pay off debts over a period of time—usually three to five years—and any payments made under the plan are usually paid to the bankruptcy trustee, which then disburses the money to the creditors. Chapter 13 bankruptcies stay on the debtor’s credit report for seven years.

This is a quick overview of the main options for those thinking about filing for bankruptcy. It’s not right for everyone. Sometimes a person may be in debt, yet there may be ways to avoid bankruptcy by negotiating payment terms with the creditor, or learning how to organize and live on a budget while slowly repaying debts. In today’s economy, bankruptcies are on the rise, and it seems like more people are choosing (or almost forced) to go that route. Overall, drowning in debt can have major emotional and physical consequences on a person and their loved ones. If debt is having this effect on you, it may be time to file for bankruptcy.

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