Bankruptcy laws can trace their roots to the Bible. The Old Testament had several laws mandating the forgiveness of debts every seven years, and even includes a form of redemption after foreclosure. Bankruptcy laws, or something similar, were enacted by the Romans. Our modern bankruptcy system has it’s roots in British laws from the 1500’s. Early bankruptcy laws favored the creditor; debtor’s had few rights, and were often thrown in jail for not paying their debts. Fortunately, bankruptcy laws evolved from being a “sword” for the creditor to being a “shield” for the debtor. Unfortunately, the 2005 bankruptcy amendments took a step back in that evolution.
All kinds of people and companies file bankruptcy. Here’s a short list: Mark Twain, Milton Hershey (Hershey’s chocolate), Henry Ford, Kmart, Macy’s, Larry King, Walt Disney and many more. Bankruptcy laws give debtors a “fresh start”. Thankfully, the days of being thrown in jail for not paying your debts is long gone (except for taxes or child-support payments). The public policy behind bankruptcy legislation is to get the debtor back into the economic system. It doesn’t benefit society for the debtor to be permanently shackled with loads of debt. It’s both humane, and in the long run, best for society to give the debtor a “fresh start”.
Chapter 7 Bankruptcy is what most people think of when they think of “bankruptcy”. Chapter 7 Bankruptcy allows the debtor to “discharge” (erase) most, if not all, of his debts. Most debtors choose to file Chapter 7 Bankrutpcy when they have no reasonable expectation to ever be able to pay back their debts, based on the amount of their income and assets. If you are over-burdened with debts and have not idea, or hope, of every being able to pay them all back, then Chapter 7 Bankrutpcy might be your best option.
Chapter 13 Debtor’s Court is a debt consolidation plan for debtors, where they pay back all or some of their debts. Chapter 13 is commonly referred to as Debtor’s Court. It is a debt consolidation plan for consumer debtors. Chapter 13 allows debtors to consolidate their debts and pay them back over a five year period. Debtors who are being on car or house payments, and are facing repossession or foreclosure, often file Chapter 13 Debtor’s Court.
Bankruptcy does NOT erase all debts. Taxes, student loans and child support payments are the three debts rarely discharged in bankruptcy. In certain cases, taxes can be discharged in bankruptcy, but it is rare. Student loans are very difficult to discharge in bankruptcy. Child support payments are never discharged in bankruptcy.
Bankruptcy is a federal law, but it differs dramatically from state to state. Why? Exemptions. Simply put, exemptions are how much “stuff” the debtor is allowed to keep when filing bankruptcy. What the debtor is allowed to keep varies dramatically from state to state. In some state, debtors with $100,000 of equity in their homes are still allowed to keep their homes (Florida). In others they are not (Alabama). Exemption amounts vary dramatically from state to state. It’s important that you, and your bankruptcy lawyer, know and understand exemptions.
Chapter 7 Bankruptcy can be filed every 8 years. If you filed Chapter 7 Bankruptcy, and your case is “discharged” (that’s a good thing), then you cannot file Chapter 7 Bankruptcy again for 8 years. You can file Chapter 13 Debtor’s Court within that 8 year period.
Chapter 13 Debtor’s Court cases can last up to 5 years, but not longer. Debtor’s Court cases cannot last longer than 5 years, so it’s important to make sure that the debtor can accomplish his goals within that time frame.
Bankruptcy will stop garnishments, repossessions and foreclosures…at least for a while…most of the time. The basic rule is that bankruptcy, either Chapter 7 or Chapter 13, will stop garnishments, repossessions and foreclosures. The “rest of the story” is that it might not stop them permanently, and in some cases (if the debtor has previously filed bankruptcy recently), it may not stop them at all! It’s very important to discuss this with your bankruptcy lawyer.
Bankruptcy will NOT ruin your credit forever. Most people who file bankruptcy already have bad credit, so filing bankruptcy doesn’t hurt much, if at all. The bottom line is this: you either need to file bankruptcy or you don’t. What bankruptcy does, or doesn’t do, to your credit score isn’t that important, in the big scheme of things.
These are just a few things you need to know about bankruptcy. Read more posts to find out about specific. Sign up for the FREE newsletter for more information.