| BANKRUPTCY DEFINED
Q. What exactly is bankruptcy?
A. Bankruptcy is a legal process through which people and businesses
can obtain a fresh
financial start when they are in such financial difficulty that they can
not repay their debts
as agreed. The fresh start is achieved by eliminating all or a portion
of existing debts
and/or by stretching out the monthly payments under the protection and
supervision of a
court. The process is also designed to protect creditors, because general
unsecured
creditors share equally in whatever payments the debtor can afford to
make.
Q. What is the process of filing for bankruptcy?
A. Filing for bankruptcy is a very personal decision. Most people
file when they have
made a good-faith effort to repay their debts, but see no way out other
than to file for
bankruptcy. Such people and businesses may declare bankruptcy by filing
a petition with
the U.S. Bankruptcy Court, that is, a request that the court provide protection
and relief
under the Bankruptcy Code. In addition to that request, the debtor must
provide
information about his or her assets, liabilities, income and expenditures.
Often, debtors
have a lawyer prepare and file the petition and other information for
them, but some
debtors represent themselves.
Use Bankruptcy with Caution
Bankruptcy may be the best, or only, solution for extreme financial hardship.
However, it
should be used only as a last resort, since it always has long-lasting
consequences. The
record of a bankruptcy remains in your credit files in credit bureaus
for as long as ten
years, which is a long time in today's economic system that is so dependent
on having
good credit. Moreover, there are limits on how often you can fully benefit
from certain
forms of bankruptcy. Study the pros and cons carefully before resorting
to bankruptcy as a
means of solving your economic troubles.
Q. What are the advantages of filing for bankruptcy?
A. There are several advantages to filing for bankruptcy.
By far the most important advantage is that debtors may obtain a fresh
financial
start. As we shall see below, consumers who file for Chapter 7 may be
forgiven
(discharged from) most unsecured debts. A secured debt is one which the
creditor is
entitled to collect by seizing and selling certain assets of the debtor
if payments are
missed, such as a home mortgage or car loan. With those two major exceptions,
most
consumer debts are unsecured.
You may be able to keep (that is, exempt) many of your assets, although
state laws
vary widely in defining which assets you may keep.
Collection efforts must stop. As soon as your petition is filed, there
is by law an
automatic stay, which prohibits most collection activity. If a creditor
continues to try to
collect the debt, the creditor may be cited for contempt of court or ordered
to pay
damages. The stay applies even to the loan that you may have obtained
to buy your car. If
you continue to make payments, it is unlikely that your creditor will
do anything.
However, if you miss payments your creditor will probably petition to
have the stay lifted
in order either to repossess the car or to renegotiate the loan.
You cannot be fired from your job solely because you filed for bankruptcy.
Q Since your bankruptcy filing will remain on your credit record
for up to ten
years, how will that affect your future finances?
A. A bankruptcy is a problematic item in your credit record,
but often debtors who file
already have a troublesome history. In one respect, bankruptcy may improve
their records.
Because Chapter 7 provides for a discharge of debts no more than once
every six years,
lenders know that a credit applicant who has just emerged from Chapter
7 cannot soon
repeat the process.
Research in this area has produced mixed results. A study by the Credit
Research
Center at Purdue University found that about one-third of consumers who
filed for
bankruptcy had obtained lines of credit within three years of filing;
one-half had obtained
them within five years. However, the new credit itself may reflect the
record of
bankruptcy. For example, if you might have been eligible for a bank card
with a 14
percent rate before bankruptcy, the best card that you can get after bankruptcy
might carry
a rate of 20 percent—or you might have to rely on a card secured
by a deposit that you
make with the credit card issuer.
Q. Is there more than one type of bankruptcy?
A. Yes, there are several types, each provided in a separate
chapter of the Bankruptcy
Code, a federal statute. Proceedings under Chapter 7 (straight bankruptcy)
involve
surrendering most of the borrower's nonexempt assets, as explained later.
A bankruptcy
trustee is appointed in every Chapter 7 case to administer the nonexempt
assets (if any)
and distribute either the assets themselves or the proceeds from selling
(liquidating) them
among the creditors. Proceedings under Chapter 13 (wage earner's bankruptcy)
require
the debtor to propose a plan for repaying all or a portion of the debt
in installments from
the debtor's income. Chapter 11 of the Code, which covers businesses that
are
restructuring while continuing operations generally is not used by consumer
debtors.
While an individual may file under some circumstances for Chapter 11 bankruptcy,
such
proceedings are more expensive and complex, so that consumer debtors normally
use
Chapter 7 or Chapter 13.
Under any chapter, once the bankruptcy case ends, most borrowers are no
longer
liable for most of their pre-petition debts. (The bankruptcy court enters
a discharge order
relatively early in a Chapter 7 case; in Chapter 13 cases the borrower
makes full or partial
payment to creditors under a court-confirmed plan over a period up to
three years long, or
with court approval, up to five years, and then receives a discharge.)
This means the court
has excused the borrower from having to pay most debts. (It should be
noted, however,
that in a Chapter 7 case, the discharge does not wipe out a secured creditor's
lien.) The
borrower then starts over again with a clean financial slate except that
the record of the
bankruptcy will remain on the borrower's credit record for up to ten years.
Q. How would I find a lawyer to represent me in a bankruptcy
action?
A. The American Board of Certification has certified some 1,000
attorneys specializing in
bankruptcy. You can get their names and locations from the ABI website.
In addition,
some states certify attorneys as bankruptcy specialists when they have
had significant
experience in the field. Ask an attorney that you know well to recommend
a specialist.
Suggestions from a friend, relative, neighbor, or associate who has had
a good experience
with a particular lawyer also may help. Bar associations and groups operated
for people
with special needs, such as the elderly or persons with disabilities,
often provide referral
services. You might also find a lawyer by looking in the yellow pages
of your telephone
directory and advertisements in your local newspaper.
Of course, it is legal and proper to file your own bankruptcy petition,
though the
more complicated your debt situation, the more risky it is to represent
yourself.
Q. How would I evaluate lawyers who might represent me in a bankruptcy
action?
A. Be careful in your selection. satisfy yourself that your lawyer
is familiar with
bankruptcy law and procedures, and has a good reputation. When you have
an initial talk
with a prospective attorney, does he or she seem to understand your problems
and have
solutions or are you in a "factory" that merely processes paper?
Remember that you can,
and should, discuss your lawyer's fees in advance. This will give you
as clear an idea as
possible of what the bankruptcy procedure will cost. For more details,
see the first chapter
"When and How To Use a Lawyer" in this publication. Under certain
circumstances, you
can pay the lawyer from the assets of your estate administered by the
court in the
bankruptcy case. Depending upon the complexity of your case, your legal
fees might
range from $400 to $2,000.
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