I’m a graduating high school senior about to go off to college, which means it’s a period of big changes. Gone are the times when I could rely on my parents to generate income and pay expenses—if I want to get a tattoo as soon as I’m 18, I might as well learn how to become fiscally responsible as well. The first topic I want to cover is personal bankruptcy.
You can say I start with the worst of the worst.
The great thing about this country is that there’s always a way to get back on your feet, financially speaking—unless you’ve done something illegal. And even if you’re being sued, there’s something that can halt almost every kind of lawsuit—filing bankruptcy, an option for those who don’t have many options.
What is it? Sounds complicated. Thankfully, James P. Caher and John M. Caher already did the work for us, and wrote a nice guide called Personal Bankruptcy Laws For Dummies. I’m just here to read, summarize, and reflect.
What is Filing Bankruptcy?
In 1705, Parliament enacted a law that enabled a person to wipe out unpaid financial obligations, although this required the consent of the creditor. Over time, bankruptcy laws have become more compassionate and less punitive, and was seen by the Founding Fathers as a constitutional right; debtors deserved the ability to have a fresh start. Current bankruptcy procedures are defined by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Filing bankruptcy is essentially a procedure in which a person admits that they are not able to pay their debts, and receives help from the court. Bankruptcy can discharge most of your debts, stop foreclosure of your home, avert repossession of things such as your car, prevent your driver’s license from being revoked for unpaid fines, prevent garnishment of wages, and stop most evictions if bankruptcy is filed before a court enters a judgment from possession.
Types of Bankruptcies
There are mainly two types of bankruptcy Chapter 7 liquidation, which enables you to eliminate most of your debts but may require you to forfeit some of your assets, and Chapter 13 reorganization, which enables you to pay off all or most of your debts during a time period but doesn’t require you to forfeit any of your assets to pay unsecured debts- those that are not secured by property, such as your car.
In order to qualify for Chapter 7, you have to pass a Means Test in order to show you don’t have enough income to pay a significant portion of your debts. If you earn less than the median income for your state, you can skip this test altogether.
To qualify for Chapter 13, you must pass a best interest test, which mandates that unsecured creditors be paid at least as much as they would receive if you’d filed a Chapter 7 instead, and the best efforts test, which requires that you pay all your disposable income to the trustee for at least the first 36 months of your plan.
Other specialty kinds of bankruptcy exist—Chapter 11 bankruptcy, primarily for large business reorganizations, and Chapter 12 bankruptcy, which is particularly helpful for family farmers and family fishermen.
Drawbacks of Bankruptcy
Sounds pretty good right? Of course, bankruptcy is not a panacea, and certainly when your motive is anything other than reasonable relief from your debts. Bankruptcy generally can’t prevent criminal prosecutions, proceedings against someone who cosigned your loan, contempt of court hearings, actions to collect back child support or alimony, or governmental regulatory proceedings. In short, if you broke the law, filing bankruptcy can’t get you out of the mess.
Filing bankruptcy also doesn’t come without consequences. First of all, it’s a matter of public record, which means that your future landlord or your next employer might be able to find out you filed bankruptcy. Although governmental agencies and employers aren’t supposed to discriminate against you for filing bankruptcy, they can still do so in a roundabout way.
Second, your credit rating might go down—although your odds of obtaining credit are still pretty good even with bankruptcy on your record, you’ll probably still have to pay higher interest rates on new credit.
Third, friends and relatives can be forced to give back money or property if you’ve repaid loans or given them anything within the past year. There’s also the off chance that you could lose your home—rare, but it could happen.
Finally, there may be a stigma attached to filing bankruptcy. It’s easy to view filing bankruptcy as the easy way out for sleazy deadbeats who can clearly pay their bills, but just don’t want to. There have always been those who think that bankruptcy threatens the ethical foundations of our society, that the government shouldn’t just go easy on people because they screwed up.
I’m not here to get into a political debate, but this book makes a good case about why aggressive and sophisticated credit marketing techniques can easily drive any ordinary, hardworking consumer to lose control. The second largest growing segment of bankruptcy filers are consumers between the ages of 18 and 25, students and other young people who lack the maturity and resources to handle debt. But credit companies are more than willing to extend credit to folks with no income, no assets, and no track record, just because it’s extremely profitable.
Despite all that, bankruptcy seems like a reliable option to have around, so I’ll explore the ins and outs of it for the next few weeks with this book as my trusty guide. Stick around!
In the meantime, you can check out how much it costs to file bankruptcy here at www.debtkid.com.