Economic downturn results in losses for many business, pay cuts for most workers and a general reduction in purchasing power among the public. The recession from 2008 until the end of 2009, which left the global economy reeling, was potent enough to cause many businesses to go bankrupt. Some well known names are included in the list of companies that sank in the period. Chrysler Corp, Lehman Brothers and Washington Mutual bankruptcies stand testimony to the devastating effects of the recession on the US economy.
In addition, there were many individuals who lost jobs and thus their ability to financially sustain their debt repayments. Personal bankruptcies across the US had a big hand in the growing number of foreclosures on homes. According to the National Bankruptcy Research Center, personal bankruptcy filings were 34% higher in the initial months of 2009 when compared with the previous year. Business bankruptcies were 51% higher over the same period.
There are many Americans still struggling to regain their footing after the recession left their savings depleted. Faced with mounting debts and unmanageable expenses, they are left with no choice but to declare bankruptcy.
Navigation of the Different Types of Bankruptcy and How to File for Bankruptcy
A modification of the bankruptcy provisions in 2005 made it more complex and difficult for individuals to file for bankruptcy. For many who have no option but to declare insolvency and take advantage of the protection that bankruptcy proceedings bring, these modifications have created many obstacles. These people will now have to first enroll in debt reduction and repayment counseling programs instead of being able to declare bankruptcy under Chapter 7.
The same law applies for bankruptcy declaration across all states in the US. Although there are six separate regulations for various kinds of bankruptcies, only three of these are commonly used. Here is an outline of these three bankruptcy provisions outlined under Title 11 of the U.S. Bankruptcy Code:
After the 2005 modification, a chapter 7 bankruptcy requires a check of the individual or business’s financials to determine if they are eligible for filing under this heading. A Chapter 7 bankruptcy involves the sale of assets of the insolvent party to pay off all outstanding debts. Once this is done, the person or business is no longer liable for any debts which are still remaining over and above those fulfilled by proceeds of the sale of assets.
Chapter 7 Filing Process
To begin with, the debtor must file a bankruptcy petition. This must include a list of all the assets and debts in the name of the person. Some of the assets, like a share in a home, may be deemed exempt. These exempted assets are not liquidated to pay off the outstanding debts. There are some debts which are non-dischargeable. That is, if your asset sales cannot pay them off fully, you are still liable to pay them off after the bankruptcy proceedings. A student loan may be one such non-dischargeable debt. An experienced attorney will be of great help here in completing the formalities of filing the bankruptcy petition and explaining these nuances to you.
Visit your local Bankruptcy Trustee Office to understand exactly what they require you to do. If you have an Attorney, have him contact the Trustee who will be handling your proceedings. The Trustee is in charge of liquidating your assets based on your list. He will then disburse the proceeds of the sale to your creditors in order of priority – secured debts get top priority. Once this is done, your bankruptcy process is completed.
A Chapter 7 bankruptcy does more damage to your credit score than a chapter 13 filing. The bankruptcy can affect your score for up to 7 years and reduces your chances of getting loans at reasonable terms for this period.
For business which are forced to declare bankruptcy, Chapter 11 bankruptcy is a way to continue operations while bankruptcy proceedings and subsequent actions are going on. The court approves a reorganization of the business which is aimed at streamlining operations and cutting out all possible additional expenses to help regain profitability. The business pays off a portion of the debts while others are discharged.
An attorney will be required for a Chapter 11 bankruptcy process as this is a complicated affair and will need legal expertise. In fact, an attorney specializing in bankruptcy can prove to be invaluable especially during court proceedings.
Opt for credit counseling and get the necessary paperwork from them to prove your participation in their program.
You have a 15-day window for putting together all necessary documents and paperwork. These include assets and liabilities listings, financials of your company and any other information which may be relevant to the financial standing or repayment capability of the business. Include your credit counseling paperwork.
When you have all the necessary papers, complete the Chapter 11 bankruptcy form. You can download it here http://www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx . Once you have filed for bankruptcy, you will need to keep your creditors in the know about your financial situation. File your repayment schedule within 4 months to have the maximum control over how you fulfill your debts. Beyond this deadline your creditors can file their own version of repayment plans. However, creditors still do have a say in choosing the plan they want you to adopt.
Repayment of overdue taxes is specially dealt with under bankruptcy laws. Ask your attorney to explain these in detail before you make any payments towards this debt.
Chapter 11 bankruptcy may take several years to resolve in court. Remember to take note of hearing date and timings diligently so that you can attend all of them. This demonstrates your willingness to fulfill your dues. The court may disallow a bankruptcy petition if the debtor fails to attend hearings for 6 months or defaults on his planned repayments.
Those who are found ineligible for Chapter 7 bankruptcy can file under Chapter 13. When the individual has a consistent income he cannot opt for the complete freedom from debts which Chapter 7 affords him after liquidation of assets. Chapter 13 bankruptcy filing requires that the person make a structured repayment plan which can extend over a 5-year period to fulfill his obligations. The Court approves this scheduled repayment and the process is managed by a Trustee. The debtor is safe from any further action from lenders as long the Chapter 13 repayments are in force.
Make an exhaustive list of all assets and debts. See if you can negotiate directly with the lenders for better or softer terms before you file for bankruptcy. When all these means have been exhausted, start with planning out a comprehensive repayment schedule. Do this with support from your attorney to cover all bases and arrive at a repayment plan which will find acceptance in court.
Contact a credit counseling agency which can give you a certificate saying that at your present level of income, given the living expenses you incur, it is possible for you to repay your debts.
File Chapter 13 bankruptcy in the court with the help of an attorney. At the hearing, your potential earning capacity, the ability to sustain current earnings and the viability of your repayment plan will be studied. If the court finds it acceptable you will be granted a 3 to 5 year grace period to fulfill obligations in adherence with your repayment plan.
If you have non-exempt assets which you wish to retain, then Chapter 13 is a good option. Those with higher income may not be eligible for a Chapter 7 bankruptcy, in which case this is the only option.
Bankruptcy is, in many cases, the only option left to those with huge unmanageable debts. When there is no way for you to make good your dues in the near future or increase your income to such an extent that there is hope in the immediate future of becoming debt free, then this is the only option left to you. If you are in such a situation, remember that many other Americans have went on the same path before you and there will be thousands more.
While bankruptcy will damage your credit score, it allows you to come out of your debt problems and make a fresh start. It may take years, but a compromised credit score can be rectified by maintaining consistent payment schedules and timely fulfillment of obligations in future.