Bankruptcy isn't just for deadbeats, says MSN Money. It's an option for those who've struggled to keep on top of debt after a life-altering event, such as job loss, divorce or illness. Filing for bankruptcy may be your best bet if there's no way you can feasibly repay current debt in your lifetime.There are pros and cons to bankruptcy, as well as numerous myths attached to its outcome.
What is Bankruptcy?
Bankruptcy is a process established by federal law that allows you to proclaim your inability to pay back debt. Bankruptcy begins when you file a petition with a federal bankruptcy court. If you file for Chapter 7 bankruptcy, you're required to relinquish "nonexempt assets" to a court trustee. Nonexempt assets consist of personal property that can be liquidated by the trustee to fulfill part of your debt. For example, nonexempt assets may include tax refunds, stocks and bonds, real property, jewelry, antiques or an automobile or boat. However, the American Bar Association states that 85 percent of Chapter 7 bankruptcy filings are "no asset" filings--there's nothing that a trustee can sell off to satisfy your creditors. Chapter 13 bankruptcy usually allows a filer to keep everything (including a home and car), if the filer arranges a payment plan with the trustee to repay debt.
Bankruptcy ultimately results in a discharge, a court order barring your creditors from attempting to collect. They cannot call you or send you notices in the mail, nor can they file suit against you in court. Bankruptcy discharge occurs at different times, depending if you file under Chapter 7 or Chapter 13. Chapter 7 bankruptcy, which can leave you completely debt-free, is typically discharged around four months after the filing date. A Chapter 13 discharge typically occurs after four years, during which time the repayment plan is completed.
Bankruptcy Eligibility
While filing bankruptcy under Chapter 7 may be a more desirable choice, this is typically not an option for many wage-earners, says Credit.com financial experts. Chapter 7 bankruptcy is reserved for debtors with limited or modest means, while those who generate a relatively higher regular income have no choice but to file under Chapter 13. Chapter 7 and 13 criteria rely on the debtor's current monthly income in relation to his or her state's median income as one way to determine eligibility. Additionally, under the Bankruptcy Code, the debtor must undergo a "means test" to ascertain that he or she isn't simply trying to get out of paying debt by filing under Chapter 7.
Bankruptcy & Credit
MSN Money and Credit.com point out that one of the biggest downsides to bankruptcy is that it impedes your ability to get new credit at manageable interest rates. In fact, MSN Money describes bankruptcy as the "worst 'negative' (record) you can have on your credit report." Other negative items, such as credit card debt that simply goes unpaid, stay on your credit history for seven years, while bankruptcy, reflected in the "public records" section of your report, lingers for up to 10. This black mark on your credit can severely restrict your ability to acquire a loan for an automobile or home. However, such a purchase is possible. MSN Money notes that you may get credit and loan offers from subprime lenders--those who charge high interest rates.
Debt Be Gone?
One bankruptcy myth is that it absolves the filer of all debt types. Not true, says MSN Money. Chapter 13 bankruptcy is more generous in which debts are discharged; however, there are certain debts that don't go away. Generally, these are tax debts; debts the filer failed to note on the lists and schedules filed with the bankruptcy court; debts for child and spousal support, debts for government fines and penalties; debts for government educational loans; debts for condo or home owner's association fees; debts related to willful/malicious injuries caused to another person or his property; and debts related to personal injury suits when the filer has operated a motor vehicle while intoxicated.
Bankruptcy Costs
Bankruptcy is not free--according to the National Foundation for Credit Counseling, Chapter 7 filers must pay a $245 filing fee and $54 in other fees and charges, while Chapter 13 filers pay a $235 filing fee and $39 administrative fee--excluding the cost of attorney consultation and representation. One plus to filing for bankruptcy is that attorney representation is not required, although it is definitely advised, given the frequent changes in bankruptcy law. The NFCC also notes that filers can use the services of bankruptcy petition preparers in lieu of an attorney's services, which are usually lower than legal fees. However, one thing that filers must also keep in mind is that they are required, by law, to obtain pre- and post-bankruptcy counseling through an approved nonprofit credit counseling agency--and there are also fees associated with these services.
To File or Not to File?
The NFCC points out that filing for bankruptcy is "one of the most serious financial decisions (debtors) can make." During prefiling counseling sessions, debtors are apprised of what this legal process entails, the consequences of bankruptcy, as well as other options that are available to them. For those who spend years of their lives struggling with debt they can never hope to pay back, MSN Money states that bankruptcy can provide a "fresh start." Those who learn from the experience and begin to use existing credit responsibly can often rebuild credit records and credit scores after only a few years (see "Resources").
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