Bankruptcy

Bankruptcy today is considered the court of last resort. Think about filing for bankruptcy only after you have worked through every other available method of repaying your debts.

The American Bankruptcy Institute describes two purposes of bankruptcy:

To give creditors a fair share of the money that you can afford to pay back. (Chapter 13)
To give you, the debtor, a fresh start by discharging your debts. (Chapter 7)
Bankruptcy may be an appropriate option for you if you have contacted your creditors and negotiated repayment terms, stopped using credit cards and other loans, contacted a credit counselor and worked faithfully to stay on a debt management program -- and still cannot repay your debts. No matter which form of relief a debtor seeks, there are more disadvantages than advantages to bankruptcy.

Bankruptcy Pros and Cons
Pardons debts, or reduces debts for individuals in severe financial distress due to circumstances such as illness or loss of a job.
Puts a blemish on an individual's credit record for 10 years, causing difficulty in obtaining cars, homes, and loans.
Can temporarily prohibit creditors from seeking foreclosure of a home or repossession of a car. Results in higher interest rates -- or secured credit cards -- for people who are granted credit despite a bankruptcy record on their credit report
Can temporarily prevent wage garnishment, debt collectors' harassment, and disconnection of utilities. Does not discharge debts such as alimony and child support; most student loans; certain federal, state, and local taxes; debts from criminal activity; legal fines and penalties; luxury purchases made within 60 days of filing; and debts not listed on bankruptcy papers
Is a notice of public record that may be seen by potential employers, insurance companies, mortgage businesses, and other lenders
Is a social stigma that can cause feelings of guilt and embarrassment
Although it may fix your short-term problems, bankruptcy can stay on your credit report for a full 10 years. Before you file, remember that you'll have to live with the negative financial consequences.

Bankruptcy law has come a long way since death or debtor's prison were the sentences for those unable to pay their debts. England's original bankruptcy laws very much favored the creditor, and offered little or no hope to the debtor. Over time, a more equitable form of bankruptcy found its way into English law and was used as the starting point for United States Bankruptcy law.

The Bankruptcy Act of 1978 is the basis for the law as it currently stands, offering a fresh start when necessary. While bankruptcy laws continue to help those who truly require assistance, many individuals today mistakenly view bankruptcy as a "quick fix" to their financial troubles. For people who are behind on credit card payments, bankruptcy has become an increasingly more common request.

It is, however, the "court of last resort" since individuals who declare bankruptcy face many difficulties ahead of them.

Chapter 7 and Chapter 13 Bankruptcies
Consumers in credit card debt generally seek two forms of bankruptcy relief: Chapter 13 and Chapter 7.

Chapter 13 bankruptcies are debtor-rehabilitation proceedings in which the court mandates a repayment plan designed for the consumer to repay as much of the debt as possible.

A petitioner must have regular income to enter into a Chapter 13 debt repayment plan, which bankruptcy courts typically set for a 36- to 60-month period. After a consumer petitions for Chapter 13 bankruptcy, the court issues an order that prohibits creditors from recovering claims before any bankruptcy proceedings begin. Through the court order, the debtor is protected from creditor collection attempts such as garnishments and repossessions. After a hearing is scheduled, a court-appointed bankruptcy trustee oversees the strict repayment plan to which the debtor must adhere. If the debtor makes all scheduled payments within the time period established by the court, he or she is forgiven any remaining amounts still due after that time period ends.

Chapter 7 bankruptcies are "straight" bankruptcy plans designed to immediately liquidate the debtor's assets. All property, except that which a petitioner is allowed to keep, is turned over to a bankruptcy trustee who disburses the debtor's funds to creditors in an effort to repay part of the debts that are owed.

Because all allowable debts are discharged, many individuals choose to file Chapter 7 when it appears unlikely they will be able to pay off their debts. However, they are not exempt from such debts as student loans, alimony, child support, income taxes, and fines. Petitioners of Chapter 7 bankruptcy cannot file similarly for at least six years.