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
Options and Consequences
If you're overwhelmed by debt, bankruptcy may not be your only option. You may be able to avoid bankruptcy by:
- Talking to your creditors to see if you can work out a new payment plan or arrangement that fits your current budget
- Hire a credit counselor or credit counseling service to negotiate with your creditors to reduce your debt and make a repayment schedule
- Reconstructing your personal budget
If you think bankruptcy is your only or best alternative, then be prepared for the consequences of filing, some of which are long-term and will affect you for several years. For example:
- It will be much more difficult for you to get a mortgage or refinance your home
- You'll likely be turned down for most types of credit and loans, such as credit cards and car loans. At the very least, expect to pay much higher interest rates on these loans than other people who haven't filed for bankruptcy protection
- Some insurance companies run credit checks before they issue home, car, or life insurance policies or even renew old policies. So, your application for new insurance may denied, or your premiums may increase as a result of your bankruptcy
- In some bankruptcies, especially Chapter 7, some of your property and personal belongings may be taken and sold to pay-off your debts
Filing for bankruptcy protection isn't an easy decision. Before you make a hasty choice, consider all of your options, the consequences, and your precise financial condition.
Questions For Your Attorney
- How long will it take from the time of filing before my debts are discharged? How much will you charge to file my bankruptcy? Do I even need a lawyer?
- How many times can someone file bankruptcy?
- If I file bankruptcy, is my wife's credit and credit rating harmed in any way? Should we both file for bankruptcy protection?