Why Do People File For Bankruptcy?
Why do people file for bankruptcy? This is a question that I am asked by my friends from time to time. After all, shouldn't people pay their debts and not cause harm to their creditors? In an ideal world, this would be an acceptable standard. But, unfortunately, this is not an ideal world.
Recognizing that this is a credit based economy, people do get behind on their obligations, for various reasons. Some may have had a temporary lawoff from their job; some may incur unexpected medical expenses; some may have had a cut in pay; while others may have simply miscalculated their ability to repay their debts.
Whatever the reason, our person may now find the wolf knocking on his or her door demanding money which they do not have. This could be an embarrassing, or harassing situation. After all, who likes to have creditors calling demanding money which they do not have? Who likes to have a sheriff bringing a summons to their door? Who likes to have a foreclosure action filed aganst their residence?
The bankruptcy laws are designed to give you relief from this oppression. One of the most important benefits of bankruptcy is the "automatic stay." This means that the minute you file for bankruptcy, creditors will not be allowed to contact you any further. This means that all phone calls, collection letters, lawsuits, foreclosure actions, etc. will have to be put "on hold.' Creditors will now have to work through the court to sort things out.
Chapter 13 or Chapter 7?
The two basic types of bankruptcy for individuals is Chapter 13 and Chapter 7. Chapter 13 is a reorginaztion of your finances; and, Chapter 7 is a liquidation. Which chapter should I file? Most people file Chapter 13 when they have property to save, or cannot pass the means test. Maybe their residence is in foreclosure, or they have certain debts which they cannot discharge (taxes, for example). They can repay these debts through Chapter 13, and not lose their property.
Chapter 7, however is a liquidation. Maybe our debtor is out of work and cannot devise a repayment plan. Maybe their business has failed, and they are stuck with massive debts. Whatever the reason, Chapter 7 appears to be the best option available to meet their needs.
Whether to file Chapter 13 or Chapter 7? This is best determined by consultation with a bankruptcy attorney. The attorney will review your financial situation, budget, debts, property, and recommend the best option to suit your needs. You should not try to do this on your own, since bankruptcy is very complex and there are many pitfalls to making mistakes.
The Means Test
This is a determination of your eligibility to file a Chapter 7 case. Basically, if you have an income above a certain threshhold, you will not be qualified to file a Chapter 7 case. You will have to file Chaptder 13, and pay your creditors some portion of your debts. Congress has decided that high income debtors should not be allowed to "stiff" their creditors, if they have some ability to repay their debts. Your attorney will discuss the means test issues with you during your consultation.
This is the goal in most bankruptcy proceedings. You want to have your debts declared "null and void," and creditors permanently enjoined from contacting you. As you may be aware, when our nation was founded, there were "debtor's prisons." If you could not pay your debts, you were sent away to prison, until you paid them. This generally resulted in "life sentences," since how could you earn money to pay your debts while locked up?
Congress passed the bankruptcy laws in order to alleviate this situation. They recognized that some people get in "over their heads" and need relief. Thus, the concept of "discharge" was born. This means that you are relieved of your debts, and given a "fresh start" to get on with your life.
Bankruptcy has both its benefits, and detriments. Obviously, your credit is going to be damaged for a period of time. But, if you think the benefits outweigh the detriments, then you need to consult with an attorney to explore your options.