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Question Regarding Bankruptcy

Posted by janetwilson (My Page) on
Wed, Nov 12, 03 at 13:24

Can someone please explain to me what affect filing personal bankruptcy has on your finances? What (if any) is the benefit of filing bankruptcy? It seems to be something that so many people do these days, I don't quite understand what it means. Are they no longer liable for the debts incurred?


Follow-Up Postings:

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RE: Question Regarding Bankruptcy

A personal bankruptcy can make it difficult, if not impossible, to buy a house or a car, rent an apartment, get other types of loans, or get reasonably priced credit. It can also prevent you from getting some jobs.

Bankruptcy means that you'll be able to get out from under certain kinds of debts. Bankruptcy laws are extremely complex.

A bankruptcy stays on your credit reports for, I believe, 10 years.

Bankruptcy should never be entered into lightly, or as a solution for "oh, I've got too much credit card debt and I don't feel like paying it off."

If you go to Google.com and enter bankruptcy, you'll get more information than you ever thought possible.

If you're in trouble, I suggest exploring ALL possible options to avoid declaring bankruptcy before you actually do it.

The fees you have to pay to file for bankruptcy won't be forgiven. You have to have those up front, and they can be substantial.


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RE: Question Regarding Bankruptcy

What benefits are there from filing bankruptcy...didn't seem like any after we'd done it. Yes some bills were gone, but (for us)not many that really mattered. We still couldn't afford the essentials (gas, lights, house payment) "easily". Was it worth it...NO!!! WOuld I advise anyone to do it...NO.

Vickey-MN


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RE: Question Regarding Bankruptcy

I agree with both of the above posts; bankruptcy is a very complex topic, and it is definitely not for everyone who has financial problems. Some types of debts can be discharged in bankruptcy, and some cannot.

The two types of bankruptcy most applicable to consumers are Chapter 7 and Chapter 13. Most consumers who file do so under Chapter 7, which is the type where many obligations are discharged, which means you don't have to pay them. People who benefit most from Chapter 7 are those who have a large amount of unsecured debt, such as charge accounts and credit cards, medical bills, etc. Unsecured debt is any kind of debt where the obligation is not secured by collateral. Secured debt, such as car loans, mortgages, many home repairs, and similar obligations, will NOT be discharged under a bankruptcy unless you want to give up the item which you are using as collateral -- usually the item you owe the money on. People with a large amount of secured debt normally will not benefit much from a Chapter 7 bankruptcy filing, yet many get bad advice from attorneys or others and do file Chapter 7, needlessly wrecking their credit and getting no real benefit in exchange for it.

For these people, Chapter 13 is often a better option. Under Chapter 13, the bankruptcy court prescribes and supervises a repayment plan where the debtor repays a specified portion of the money owed on various obligations. While you'd think that creditors would look more kindly on a debtor who was trying to repay them under Chapter 13 rather than just filing Chapter 7 and walking away from the obligations, this isn't necessarily true.

One problem with Chapter 13 is that a lot of people who go that route wind up eventually not being able to live up to the court-prescribed payment plan, and then they go ahead and file Chapter 7. Because this option to file Chapter 7 remains available to them during the course of the Chapter 13 plan, creditors often won't touch them with a 10 foot pole, and getting new credit can be a real challenge. On the other hand, someone who has recently filed Chapter 7 is barred by law from doing so again for 6 years, so often that person can do surprisingly well in establishing new credit.

Bankruptcy is somewhat of a paradox in our society today, because it goes against our work ethic and most people's sense of morality, in that people are able to use the bankruptcy law to escape paying for obligations they signed a contract agreeing to pay. Yet the possibility of filing for bankruptcy protection in one factor that makes U.S. consumers far freer in their use of credit than their counterparts in Europe and other places. This stimulates our economy tremendously, and in all likelihood generates more profit for credit issuers than it costs them in bankruptcy related losses.

I live in an area of the country with a very depressed economy, and two fairly close friends have filed bankruptcy. I went along to the bankruptcy trustee hearing with one of them. I have to tell you honestly that filing bankruptcy in America today is very easy. A lot of the people there filing bankruptcy were clearly there just because they were irresponsible and spent like drunken sailors with no regard for their ability to pay it back. Many of these people are repeat filers who are abusing the bankruptcy system.

However, in the case of the two families I am referring to here, bankruptcy was a Godsend, and in one of the cases it very possibly kept the family from splitting up, as financial problems were tearing them apart. In the cases where it is used properly, bankruptcy is a very healthy recognition by our society that money is not the most important thing in the world, and financial problems should not destroy a family or ruin a person's whole life.


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RE: Question Regarding Bankruptcy

Hi Ken,

I respectfully beg to differ (and I know you'd be disappointed if I didn't do so ;~)

However, in the case of the two families I am referring to here, bankruptcy was a Godsend, and in one of the cases it very possibly kept the family from splitting up, as financial problems were tearing them apart.

I would opine that it wasn't bankruptcy (the abandonment of one's financial commitments & honorable word) that kept that family together. Relationships are bonds of social & emotional commitment. Anyone who would abandon a partner for financial reasons, but choose not to when the financial reasons change really wouldn't seem to be much of a reliable life partner... in my painfully experienced opinion.

In the cases where it is used properly, bankruptcy is a very healthy recognition by our society that money is not the most important thing in the world, and financial problems should not destroy a family or ruin a person's whole life.

The ONLY proper use of bankruptcy is to protect working, income-earning assets from being destroyed, liquidated or seized by creditors which would then eliminate an entity's ability to continue to earn revenues. Virtually zero personal bankruptcies are used for this... because virtually all individuals considering personal bankruptcy have NO ASSETS to seize, let alone income producing assets! Instead, personal bankruptcy is most often used to emotionally escape the bounds they've placed on themselves in habit & practice.

Yes, there are exceptions (and I hope this was the case for your friends,) but the plain & obvious observable fact is that the exceptions are few and far between.

There ARE appropriate places for the "Financial Neutron Bomb" of bankruptcy... but personal finance is very very rarely where it's likely to be found.

I've personally known quite a few victims of their own finances who've succumbed to the bait of bankruptcy, and without exception the emotional repercussions after the fact have been very sad to see (not to mention the obvious financial repercussions.)

I've yet to meet anyone proud of their choice to go bankrupt.

Cheers,
Dave


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RE: Question Regarding Bankruptcy

Dave, in both of these cases of personal bankruptcy that I was citing above, the families were in danger of losing their homes and vehicles if they had not filed. Creditors were on the brink of suing them and getting attachments on their wages, which would have left them without sufficient funds to make rent payments in one case, house payments in the other, and vehicle payments in both cases. Loss of employment was a substantial factor in both of these cases, so making arrangements with creditors (tried in both cases) wasn't an option, since there just wasn't enough money to pay everyone.

So at least in these cases, and I believe in a fair number of others, a personal bankruptcy IS a way to protect assets. A family's home is its most important asset, and a safe, functioning vehicle is needed to provide access to reasonable employment opportunities, especially here, where public transportation is essentially unavailable.

Financial problems can and do cause the destruction of families. I agree with you that ideal relationships would not falter under such strain, but unfortunately not everyone's relationships are ideal, and money problems are a leading cause of divorce. We are imperfect creatures.

I definitely agree with you that no one is proud of having to file bankruptcy. But I can tell you from personal observation that both of these families are better off now than before they filed. One filed in 1998, and the other in 1999. That doesn't change the fact that many people do file bankruptcy for the wrong reasons, or because of a simple desire to avoid paying for obligations. That's wrong when it happens, and I know it happens a lot.


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RE: Question Regarding Bankruptcy

One reason personal bankruptcy filings are up, despite recent federal legislation that has made bankruptcy a less desirable option, is that many couples buy a house which requires two incomes to make the mortgage payments. If one of them happens to lose his/her job and has trouble finding another in this uncertain economy, then they find themselves up the proverbial creek and the only available paddle may be bankruptcy.


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RE: Question Regarding Bankruptcy

I worked for several years in a very large financial institution (Navy Federal Credit Union).

One of the biggest issues facing us was escalating bankruptcy writeoffs.

From our studies, one of the most common reasons for a person to declare bankruptcy is getting in over his/her/their head in revolving debt -- credit cards.

It was not at all uncommon to pull 10 files at random, and find that as many as 7 of the 10 had run up HUGE credit card bills.

One of the most impressive cases I remember was that of an E-4 and his wife. Between the two of them they had nearly $85,000 in credit card debt, most of it at credit rates well in excess of 16%.

One high-ranking officer's wife had racked up over $125,000 in credit card debt that she had hidden from her husband for some time, until the family's finances collapsed.

At the time, the early to mid 1990s, credit card companies were pushing their cards VERY agressively. The economy was still good, unemployment was low, and it wasn't at all uncommon for someone to receive as many as 10 credit card solicitations a day.

The card companies made it very easy to someone who was already in debt to get one of their cards -- they would just jack up the interest rate as a "buffer" against the person not paying them back.


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RE: Question Regarding Bankruptcy

Ken,

I'm no lawyer (don't even play one on TV ;~), but it was my understanding that the BK courts allow protection to reasonable transportation & housing. Of course, anyone can usually buy a safe used vehicle for cash quite cheap, and renting an apartment is also reasonable.

That said, I can understand the potential for the scenario you raise. I hope your friends overcame their tendencies that took them into those troubled waters in the first place.

Maxwell,
As kframe states, personal BKs correlate to consumer revolving credit overload far more prevalently than mortgage overleverage. You be very hard-pressed to find a personal BK with a high mortgage and little or no credit card leverage (that had been established AFTER the mortgages.)

This is because mortgage lenders underwrite to avoid bankruptcy & foreclosure. FC is the LAST resort of recapture for a mortgage lender. Unfortunately, our legal system doesn't allow mortgage lenders to block out a borrower's ability to dig themselves deeper in consumer debt after the mortgage is established... or they would.

Cheers,
Dave Donhoff
Just some mortgage guy ;~)


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RE: Question Regarding Bankruptcy

Right, Dave, bankruptcy courts do allow a person to protect a certain amount of equity in a home and vehicle.

I also agree with you and Kframe that revolving credit is a leading cause of bankruptcy. Gambling is a very big one too, as is the failure of a sole proprietorship business.

The message I get from that is that issuers of revolving credit are giving a lot of credit to people who are already overextended. For them it's a numbers game: They know a certain percentage will file bankruptcy, and they are making a business decision that they are going to make more money with their easy credit policies than they're going to lose through bankruptcies. This is pretty clearly what's happening, as the credit card divisions of most major banks are their most profitable enterprises.

So, it is hard for me to shed tears for the credit issuers who are losing money when people file. If they really have an interest in cutting down bankruptcies, what needs to happen is that instead of spending billions of dollars lobbying Congress for new bankruptcy laws, the industry ought to police itself better by developing industry-wide guidelines for the extension of credit. I doubt we'll see that, though, because they're doing great the way things are right now.


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RE: Question Regarding Bankruptcy

The conclusion reached by the authors of the recently published "The Two Income Trap" is that more and more middle-class, two-earner families are falling into bankruptcy or foreclosure, not because of out-of-control discretionary spendiong, but because of soaring prices for housing and education. So much of their income goes to fixed expeses that they have virtually no financial cushion to absorb soemthing like a job loss.

The book is coauthored by Harvard Law School bankruptcy expert Elizabeth Warren. I haven't read it, but I assume that it must contain some evidence for their analysis of the problem.

Here's the Amazon link for anyone interested:

Here is a link that might be useful: The Two Income Trap


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RE: Question Regarding Bankruptcy

I too have read only the summary of the book, but it reminded me that thirty years ago a relative was jumping up and down with joy over the strides of women in the workplace. I am about as liberal as it comes in regard to the rights of women, but I did not rejoice in women moving into the workplace because I wanted to be a stay at home mom. I knew that once two-income families became normative the cost of living would rise to meet the difference and then everyone, want to or not, would be forced into the workplace and that is exactly what happened. The point of the book, as I understand it, is that because we now rely on two incomes we have doubled the chance that we will end up in bankruptcy or other serious financial trouble. I am living in a high unemployment state and I have seen this happen. I lost my job with the government because environmental educators were no longer deemed an essential public service. Fortunately we never used my income for daily living expenses. We are, however, missing our ability to make capital purchases.


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RE: Question Regarding Bankruptcy

Gandbb, that's a great point, and something else that shows up in discussions of this type is the tremendous difference in economic conditions in different parts of the country. People who live in areas of relative economic prosperity, I notice, often don't recognize the magnitude of the problems of people in more troubled areas. Or they dismiss the whole issue by saying, "Well, move!" Not only is that often not an option for people, for a variety of different reasons, but if they step back and think it over, I don't really think the people in the areas with good economic conditions really want a huge influx of unemployed people from other places putting a drain on their social services and competing for their jobs.


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RE: Question Regarding Bankruptcy

Amen, Gandbb! We live in an area of fairly low paying jobs and real estate prices rising astronomically. I am fairly young (under 30) and just starting to think about starting a family. Because housing prices are so high in relation to income, my husband and I have no choice but to stay in the condo we purchased a few years ago if I want to stay home with our kids. Not ideal, but the only way we will be able to continue to live comfortably. I refuse to live one step removed from financial disaster.

To give you an idea of how much home prices have risen in recent years, we purchased our condo for $85k 4 years ago. An identical condo in our neighborhood recently sold for almost $130k. And housing prices have risen even faster!

Jenn


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RE: Question Regarding Bankruptcy

DH and I own a small business, just completed year #3, we're in debt up to our eyeballs and he has yet to draw a salary. Luckily I have a decent corporate job to see us through. We've cut back to the bare necessities in employees and expenses -- but rent is not cheap and we have an SBA loan with huge payments. We keep hoping to see a turnaround soon.

I'm a strong believer in repaying my obligations but can see where someone could easily be put in a position where there was no other option than to declare bankruptcy.


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RE: Question Regarding Bankruptcy

Exactly. And the knowledge, deep in the back of your mind, that bankruptcy IS an option of the worst happens and you fail, is one factor that influences you and others to take the risk of starting a small business. Considering that the majority of new jobs are being created by small businesspeople, that's a pretty significant point.


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RE: Question Regarding Bankruptcy

"Fortunately we never used my income for daily living expenses. We are, however, missing our ability to make capital purchases."

If I may be so bold, what did you use your income for? Did you use it to establish college funds for the kids and nest eggs for you and your spouse?

That's the smart way of doing it, and I know a few people who have managed to do that, even where I am, in Washington, DC.

What amazes me is that I own a townhome in one of the more expensive area of the nation, and I manage it on a single salary.

I'll admit that my ex-wife and I bought when the market was low, but after she and I split I kept the house. It was EXTREMELY tight at times, and I'm still carrying too much credit card debt that I'm working on erasing.

There were some really tight times when I truly thought I was going to have to either get rid of the house or plunge into the bankruptcy option.

Then my job situation changed for the MUCH MUCH better, I'm sitting on nearly $150,000 equity in my home (housing prices in my community have gone NUTS in the last 3 years), I'm socking 23% of my paycheck away into a 401K (the maximum I can go) plus more into other funds, and I'm still keeping ahead on all of my other payments.

I use my credit cards too much, there's no doubt about that, but I keep it to a dull roar, and over the past two years have erased about $5,000 of $12,000 in credit card debt and moved much of it to cards that have interest rates at or below 10%.

Living within one's means isn't difficult for most people. It takes discipline and EDUCATION on the wise use of credit.

That's the kicker. The credit card companies that were approving everyone and their 1-year-old brother (the agressive marketing of revolving credit to college and even high school students should be illegal, or heavily curtailed in my opinion) largely have only themselves to blame for their losses no matter how much they whine about it. They weren't educating people about credit use, and it's hurt a LOT of people.

One of the things that I did with Navy Federal was write member educational materials on credit use.


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RE: Question Regarding Bankruptcy

I think the biggest obstacle we have with our business has been the SBA loan we took out. The SBA required us to extend the length of our facility lease to the length of the loan (7 years). We extended the lease 2 days before the closing, one day before the closing our facility flooded - MAJORLY flooded when all of Houston was under water following Tropical Storm Allison. Because we hadn't closed on the loan the flood insurance was not in effect and we lost almost everything. When we finally did close on the loan we spent a large portion of the funds replacing items lost in the flood and in clean up efforts. It was devastating to say the least. We've made mistakes and learned a lot. If we had to do this all over again we would never do it - never.


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RE: Question Regarding Bankruptcy

an awful lot of my income went into savings against the day we knew would come when we had to move to a metropolitan area for my husband's job. It cost 100k more to buy a house 2/3 as big as the one we were living in. I also indulged in a brand new "off the lot" Honda Civic, I put a good roof on the house - better than we would otherwise have spent for. I purchased our first new furniture, and put new rugs in our house. I didn't put as much into an IRA as I should have, and yes, of course, I helped the children with college - still am.


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