The
reason for this is that a bankruptcy will have long term effects
on your credit worthiness and can also affect other important
factors in your life such as employment and self esteem.
Certainly there are cases where a bankruptcy is necessary.
However in many cases the negative
effects of bankruptcy can be avoided by understanding all of the
options available in lieu of filing. Below is a list of some of the
negative effects of bankruptcy as well as some of its advantages
given the right situation.
Cons:
• A bankruptcy stays on your credit
report for 10 years, making it difficult to obtain credit, buy
a home or car, or sometimes get a job or apartment.
• A fee must be paid to a bankruptcy attorney, which may be
expensive.
• You may lose non-exempt assets through the process,
including losing your ability to use the credit cards.
• A recent bankruptcy makes it nearly impossible to get
financing for a mortgage.
• A bankruptcy stays on your credit report for 10 years,
making it difficult to acquire credit, buy a home or car, get
life insurance, or sometimes get a job.
• Not all debts may be "discharged" in a bankruptcy and a
monthly payment may still be required to pay off a Bankruptcy.
• Bankruptcy can be embarrassing and carry a negative stigma.
(Also your name will be in court records and could possibly
appear in the newspaper.)
• It may be a long time before you are able to get any type of
credit again, including credit cards.
Pros:
• It stops all collection actions by creditors, including
repossessions, and garnishments upon filing.
• Major assets such as your car, house and other essentials
may be exempt from bankruptcy in most states.
• Prevents you from being sued for bad debts and stops a
foreclosure process.
Purpose
The primary purpose of bankruptcy is: (1) to give an honest
debtor a "fresh start" in life by relieving the debtor of most
debts, and (2) to repay creditors in an orderly manner to the
extent that the debtor has the means available for payment.
Bankruptcy allows debtors to be discharged from the legal
obligation to pay most debts by submitting their non-exempt
assets, if any, to the jurisdiction of the bankruptcy court
for eventual distribution among their creditors. There are two
common forms of bankruptcy: a reorganization bankruptcy and a
liquidation bankruptcy.
A reorganization bankruptcy is a
bankruptcy in which the debtor may reorganize their assets and
debts to allow the debtor to carry on with the core of its
endeavor while partially satisfying creditor claims. In a
liquidation bankruptcy, the assets are sold off to satisfy
creditor claims. Reorganization bankruptcy may include plans
for individuals and for businesses.
Businesses may enter a
reorganization bankruptcy in order to survive insolvency due
to creditor claims exceeding the ability of the business to
satisfy them. The basic process involves a business reducing
each creditor's claims to allow partial payment in order for
the business to carry on with its daily commercial activity.
Individuals may enter a
reorganization bankruptcy in order to retain assets and pay
off reduced creditor claims out of the individual's income. A
married couple may be treated as an individual.
During the beginning stages of a
bankruptcy proceeding the debtor is protected from most
non-bankruptcy legal action by creditors through a legally
imposed stay. Creditors cannot pursue lawsuits, garnish wages,
or attempt to compel payment.
History
In the Old Testament of the Bible and Hebrew Scriptures,
Moses' Laws prescribed that one "Holy Year" or "Jubilee Year"
should take place every half century, when all debts are
eliminated among Jews and all debt-slaves are freed, due to
the heavenly command.
Moreover, the Hebrew (or Jewish)
law of debt forgiveness can be found in the Bible at
Deuteronomy 15:1–2 which instructs a release of debt every
seven years.
In ancient Greece, bankruptcy
did not exist. If a father owed (since only locally born adult
males could be citizens, it was fathers who were legal owners
of property) and he could not pay, his entire family of wife,
children and servants were forced into "debt slavery", until
the creditor recouped losses via their physical labour. Many
city-states in ancient Greece limited debt slavery to a period
of five years and debt slaves had protection of life and limb,
which regular slaves did not enjoy. However, servants of the
debtor could be retained beyond that deadline by the creditor
and were often forced to serve their new lord for a lifetime,
usually under significantly harsher conditions.
The word bankruptcy is formed
from the ancient Latin bancus (a bench or table), and ruptus
(broken). A "bank" originally referred to a bench, which the
first bankers had in the public places, in markets, fairs,
etc. on which they tolled their money, wrote their bills of
exchange, etc. Hence, when a banker failed, he broke his bank,
to advertise to the public that the person to whom the bank
belonged was no longer in a condition to continue his
business. As this practice was very frequent in Italy, it is
said the term bankrupt is derived from the Italian banco rotto,
broken bank (see e.g. Ponte Vecchio). Others choose rather to
deduce the word from the French banque, "table", and route, "vestigium,
trace", by metaphor from the sign left in the ground, of a
table once fastened to it and now gone. On this principle they
trace the origin of bankrupts from the ancient Roman mensarii
or argentarii, who had their tabernae or mensae in certain
public places; and who, when they fled, or made off with the
money that had been entrusted to them, left only the sign or
shadow of their former station behind them.
Bankruptcy is also documented in the Far East. According to
al-Maqrizi, the Yassa of Genghis Khan contained a provision
that mandated the death penalty for anyone who became bankrupt
three times.
The characteristic discharge of debts was introduced to
Anglo-American bankruptcy with the statute of 4 Anne ch. 17 in
1705, where the discharge of unpayable debts was offered as a
reward to bankrupts who cooperated in the gathering of assets
to pay what could be paid.
Bankruptcy in the United States
Bankruptcy in the United States is a matter placed under
federal jurisdiction by the United States Constitution (in
Article 1, Section 8), which allows Congress to enact "uniform
laws on the subject of Bankruptcy throughout the United
States." Its implementation, however, is found in statute law.
The relevant statutes are incorporated within the Bankruptcy
Code, located at Title 11 of the United States Code, and
amplified by state law in the many places where Federal law
either fails to speak or expressly defers to state law.
While bankruptcy cases are always filed in United States
Bankruptcy Court (an adjunct to the U.S. District Courts),
bankruptcy cases, particularly with respect to the validity of
claims and exemptions, are often highly dependent upon State
law. State law therefore plays a major role in many bankruptcy
cases, and it is often not possible to generalize bankruptcy
law across state lines.
The most common types of
personal bankruptcy for individuals are Chapter 7 and Chapter
13. In Chapter 7, a debtor surrenders his or her non-exempt
property to a bankruptcy trustee who then liquidates the
property and distributes the proceeds to the debtor's
unsecured creditors. In exchange, the debtor is entitled to a
discharge of debt, except that the debtor will not be granted
a discharge if he or she is guilty of certain types of
inappropriate behavior (e.g. concealing records relating to
financial condition) and except that some debts (e.g. spousal
support, some taxes) will not be discharged even though the
debtor is generally discharged from his or her debt. Many
individuals in financial distress own only exempt property
(e.g. clothes, household goods, an older car) and will not
have to surrender any property to the trustee. The amount of
property that a debtor may exempt varies from state to state.
Chapter 7 relief is available only once in any eight year
period. Generally, the rights of secured creditors to their
collateral continues even though their debt is discharged
(e.g. absent some arrangement by a debtor to surrender a car
or "reaffirm" a debt, the creditor with a security interest in
the debtor's car may repossess the car even if the debt to the
creditor is discharged).
In Chapter 13, the debtor
retains ownership and possession of all of his or her assets,
but must devote some portion of his or her future income to
repaying creditors, generally over a period of three to five
years. The amount of payment and the period of the repayment
plan depend upon a variety of factors, including the value of
the debtor's property and the amount of a debtor's income and
expenses. Secured creditors may be entitled to greater payment
than unsecured creditors.
The Bankruptcy Abuse Prevention
and Consumer Protection Actof 2005, Pub. L. No. 109-8, 119
Stat. 23 (April 20, 2005) ("BAPCPA"), substantially amended
the Bankruptcy Code. Many provisions of BAPCPA were forcefully
advocated by consumer lenders and were just as forcefully
opposed by many consumer advocates, bankruptcy academics,
bankruptcy judges, and bankruptcy lawyers. Its enactment
followed nearly eight years of debate in Congress. Most of its
provisions became effective on October 17, 2005. Upon signing
the bill, President Bush stated:
Under the new law, Americans who
have the ability to pay will be required to pay back at least
a portion of their debts. Those who fall behind their state's
median income will not be required to pay back their debts.
The new law will also make it more difficult for serial filers
to abuse the most generous bankruptcy protections. Debtors
seeking to erase all debts will now have to wait eight years
from their last bankruptcy before they can file again. The law
will also allow us to clamp down on bankruptcy mills that make
their money by advising abusers on how to game the system.
Among its many changes to
consumer bankruptcy law, BAPCPA enacted a "means test", which
was intended to make it more difficult for a small number of
financially distressed individual debtors whose debts are
primarily consumer debts to qualify for relief under Chapter 7
of the Bankruptcy Code. Contrary to this intention, however,
the Means Test often results in debtors more easily obtaining
a discharge. If a debtor does not qualify for relief under
Chapter 7 of the Bankruptcy Code, either because of the Means
Test or because Chapter 7 does not provide a permanent
solution to delinquent payments for secured debts, such as
mortgages or vehicle loans, the debtor may still seek relief
under Chapter 13 of the Code. A Chapter 13 plan often does not
require repayment to general unsecured debts, such as credit
cards or medical bills.
BAPCPA
also requires individuals seeking bankruptcy relief to
undertake credit counseling with approved counseling agencies
prior to filing a bankruptcy petition and to undertake
education in personal financial management from approved
agencies prior to being granted a discharge of debts under
either Chapter 7 or Chapter 13. Some studies of the operation
of the credit counseling requirement suggest that it provides
little benefit to debtors who receive the counseling because
the only realistic option for many is to seek relief under the
Bankruptcy Code.
