You are several years out of college, things are going well at the job and you have just purchased a house. The mortgage was a bit of a stretch but you are swinging the addition of a monthly mortgage to your car loan and student loans. You have been keeping a small balance on your credit cards but with added household expenses you anticipate carrying a little extra credit card debt.
A year goes by and that big contract your company was expecting to land doesn’t come through and neither do your raise and bonus. You notice your credit card balance creeping up and you begin letting a student loan payment slip here and there. Before you know it you are caught in a debt spiral.
And you would not be alone. Each year since 1996, more than one million Americans have filed for personal bankruptcy, according to the American Bankruptcy Institute. One in every 68 American families files for bankruptcy each year.
Bankruptcy is a long-time legal remedy whereby an applicant petitions a bankruptcy court to be relieved of his or her debts. Bankruptcy is handled at the federal level and the procedure is essentially the same for filing bankruptcy regardless of the state in which you live. You can research the legal forms and procedures necessary to file bankruptcy yourself or retain the services of a bankruptcy lawyer.
There are several types of bankruptcy, some of which are invoked by specialized applicants such as small businesses or farmers. Consumers normally choose to file either Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 bankruptcy is the most popular, accounting for about 75% of all bankruptcy filings. It is known as the ‘fresh start’ bankruptcy because it dismisses all unsecured debt. Typical examples of unsecured debt are credit cards and signature loans and medical bills. Filing Chapter 7 bankruptcy can also bring relief from Internal Revenue Service debts, garnishment of wages, foreclosures, and lawsuits.
Chapter 13 bankruptcy does not wipe out debts but allows the debtor a bit of space to maneuver. Upon petition for Chapter 13 bankruptcy, the court examines a debtor’s income and assets and ability to pay unsecured debts and structures a program to clear the debts over a three to five year period. The debts are all handled by a trustee who metes out payments according to predetermined formulas. The debtor makes a single payment to the trustee. In this way, creditors will get at least a portion of the monies owned and may even recover the entire debt over time.
While Chapter 7 removes all debt, Chapter 13 bankruptcy is a way to reduce debts and make payments manageable for a struggling debtor. Thus Chapter 7 bankruptcy is suspect of being abused by people who can pay but simply don’t want to. Bankruptcy reform proposals are before Congress to tighten regulations on means-testing to determine if a filer truly needs debt relief.
Bankruptcy once carried a stigma within the community and necessitated considerable hardship for those who filed. But with so many people filing for bankruptcy today, there is little problem in obtaining credit again immediately after declaring financial insolvency. Even those with big bank accounts look at bankruptcy as a tool in an overall debt management program, just another financial tool.
We’ve come along way since the days when George Bailey stood on a Bedford Falls bridge contemplating suicide in It’s A Wonderful Life because of a misplaced $8000 loan that threatened to bankrupt his bank.