The economic turmoil and recession that began in 2008 and is still being felt in early 2010 has caused an ever-rising increase in personal bankruptcies. If you're thinking about filing bankruptcy, you should know about some options and alternatives. You also need to be prepared for the consequences of filing bankruptcy.
Bankruptcy is a very complex area of law. In simple terms, however, it's the mechanism that lets companies and individuals get out from under oppressive debts and get a fresh start. The laws are different depending on if it's a company or an individual consumer like you and me who's filing for bankruptcy protection. Although the tough economy has hurt US businesses, the rise in bankruptcies is most visible with respect to individuals, especially middle-class Americans.
What's bankruptcy do? There are two types of personal bankruptcies:
Chapter 7 works to wipe out some or all of your debt, like credit card balances and medical bills. When your debts are erased, it's called a discharge. This is the most common type of bankruptcies for individuals
Chapter 13 creates a plan or schedule to repay your creditors over a 3- or 5-year period of time
Under the current bankruptcy laws, if you're able to repay all or some of your debts, then you can't file Chapter 7 and get a full discharge. Also, whether you file under Chapter 7 or 13, a means test is used to determine if you have the ability to repay any of your debts, how much you have to repay, and how long you'll get to repay it. Also, before you can file for bankruptcy protection, you need to participate in a credit counseling program that's designed to teach you how to avoid falling into debt in the first place.
On the Rise
The statistics are staggering. According to the National Bankruptcy Research Center, which collects and analyzes bankruptcy data:
- There were two-thirds more bankruptcies filed in 2009 than 2008
- In 2009, there were 1.41 million personal bankruptcy filings, which is a 32% increase from 2008
- As of November 2009, personal bankruptcies under Chapter 7 rose 42% from the November 2008 level
- Bankruptcy filings in December 2009 topped 110,000, a 32% increase over December 2008
There are several reasons for the increased bankruptcy filings, including:
Job loss. With unemployment rates between 8% and 10% through 2009, many people simply couldn't afford to repay the debts they had before losing their jobs, and many consumers went further into debt after losing their jobs, using credit cards and lines of credit to pay bills and other expenses
Medical expenses. One of the major reasons many individuals file bankruptcy is because they have unexpected medical expenses that aren't covered by insurance, either all or in part, or the individual doesn't have medical insurance at all
Foreclosures . With the fall of the housing and real estate market, many consumers are faced with foreclosure and the loss of their homes. Filing for bankruptcy will, in most cases, stop foreclosure actions and allows homeowners to keep their homes while repaying the debt