What is Bankruptcy?

Bankruptcy laws in the United States are designed to provide relief for people who have unmanageable debt due to job loss, disability, divorce, medical bills, or other reasons. Many people who file for bankruptcy are dealing with more than one of these situations. Bankruptcy allows people to regain some control of their finances by discharging or re-structuring debts. It basically allows people to start over financially, though it extracts a high price in the process. From 2005 to 2010, bankruptcy filings in the United States increased steadily, before dropping by about 10% in 2011.

Facts about Bankruptcy

In 2005, a new federal law made it harder for individuals to have their debts discharged through bankruptcy. Most filers have to repay at least some of their debts over a three to five year period. In 2010, more than 1.5 million individuals declared bankruptcy, representing a 9% increase over 2009. The drop in the number of bankruptcy filings in 2011 may be attributable to laws extending unemployment benefits for those who face long term unemployment. Additionally, creditors are becoming more willing to work with debt-laden consumers so that they can collect at least part of what they are owed without having to appeal to a bankruptcy court. For people who cannot work out a repayment plan with creditors, bankruptcy under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Codes is an option. It is harder to qualify for Chapter 7 bankruptcy than for Chapter 13 bankruptcy due to the changes in bankruptcy laws in 2005.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as "straight bankruptcy" is the simplest and fastest form of bankruptcy. Under Chapter 7, assets may be liquidated and debts discharged. It is particularly helpful for people who have overwhelming unsecured debt such as medical bills and credit card debt. Chapter 7 bankruptcy requires the filer to hand over non-exempt property to a trustee, who then sells the property and divides up the proceeds among creditors. Some debt is discharged unless the filer has violated laws about hiding assets, but other debts are not discharged regardless. The following types of debt are not discharged under Chapter 7:

• Spousal support (alimony)
• Child support
• Student loans
• Some taxes

Chapter 13 Bankruptcy

This type of bankruptcy develops a payment plan for filers who have regular income so that they can repay some or all of their debts. It allows debtors to stop collection efforts, yet still repay what they can. Homeowners facing foreclosure choose Chapter 13 bankruptcy in order to stop the foreclosure from taking place. Though assets are not liquidated with Chapter 13 bankruptcy, the filer has to earmark a portion of future income for repaying creditors over three to five years. After this time, if the filer has made the payments agreed upon, remaining debts are discharged (with the same exceptions as with Chapter 7).

Alternatives to Bankruptcy

There are three main alternatives to filing for bankruptcy, depending on how severe the debt is:

• Personal austerity - cutting back on expenses and devoting more to paying down debt
• Credit counseling - developing a payment plan without declaring bankruptcy
• Debt settlement - negotiating with creditors to decrease the amount owed in exchange for a lump sum payment of part of the debt

Clearly, cutting back can only do so much, so personal austerity is best for those with steady income and high (but not overwhelming) debt loads. Credit counseling does not damage credit history like bankruptcy does, but debts are not discharged. Debt settlement for many people is a last attempt at dealing with debts before filing for bankruptcy.

Sources:

http://nwdrlf.com/bankruptcy-info/understanding-the-personal-bankruptcy-fundamentals/
http://www.prweb.com/releases/2011/1/prweb8051362.htm
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre41.shtm
http://www.dailyfinance.com/2011/10/05/personal-bankruptcy-filings-fall-but-thats-nothing-to-cheer-ab/