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Tuesday, July 23, 2013

Personal Bankruptcy- A General Overview

Today we're going to focus on personal bankruptcy..

Its a funny thing-- If you're a corporation, going bankrupt attaches no social stigma whatsoever...  

Nothing to it.. File a 'Chapter 11', some creditors get burned, there's restructuring of payments and then the business continues operating as normal...

The public really doesn't care or in most cases even know..
Now when its personal filing, then the individual is supposed to feel some kind of shame or remorse, and particularly when its a famous celebrity doing the filing, they're are ridiculed.

Funny double standard we set up...

Most people don't know much about bankruptcy-- even those who've had to file, basically put their trust and faith in some scavenger attorney to save their financial rear-ends, never realizing until its too late your attorney really works for the other side..

So we're just going to give you a brief, easy to understand primer of  the various types of bankruptcy and how the process works generally..  
Before we begin, if you are thinking of filing, don't base your decision solely on this posting-- do the necessary research to find out what's the best course of action for you.  And most importantly, do not feel any embarrassment or shame for doing so...   

Corporations certainly do not...

We begin..
In Title 11 of the United States Code (the Federal Bankruptcy Code), there are four bankruptcy filings:

Chapter 7 - Liquidation
Chapter 11 - Reorganization
Chapter 12 - Adjustment of Debts of a Family Farmer with Regular Annual Income
Chapter 13 - Adjustment of Debts of an Individual with Regular Income

There is also a Chapter 9 but that deals with municipalities such as what's occurring with Detroit
We will take a moment to explain each one but as an individual, if you ever did need to file at a future point, you'd be concerned with either '7', '11' or '13'

Chapter 7:

Companies, married couples and individuals are allowed to file..

A debtor filing for this is essentially scrapping everything and starting over, hoping for a clean financial slate. 

Once the filing is underway, an administrator or trustee is appointed to maneuver the sale of the debtor's assets. This does not necessarily mean that everything the person owns is sold.  
Sometimes an individual has nothing or holds possessions it is not legally obligated to sell thus the creditors do not receive any repayment yet the debts are fully discharged.

Both federal and state laws allow for certain exemptions such as his or her primary residence or personal items like clothing. 

Now once the debtor's assets are liquidated, the trustee pays certain creditors a portion of the money raised.  Usually you pay your attorney who keeps a percentage for him/herself..

As we said before, not all of the creditors receive money from the proceeds, so many of those financial obligations are "forgiven," or discharged. 
Once someone has filed for bankruptcy under Chapter 7, he or she cannot file again for seven years, and debts that were not forgiven in a previous filing will not be discharged in the next filing.

Important: there are certain debts for which the debtor will receive no forgiveness. Alimony, child support and taxes are not discharged under any bankruptcy filing, and student loans** are seldom discharged. 

So if a lot of your debt falls into these categories, you might be better off filing Chapter 13.

** As we often try to warn people here, don't attend college and take on student debt unless you really have a game plan mapped out for a career path where there's a true job market need for your skill sets.
Chapter 9:

As mentioned before, this only applies to a municipality, such as a city, town, village, county, taxing district, municipal utility, and school district...

 Under Chapter 9 Bankruptcy, the municipality is expected to reorganize and propose a plan of repayment, similar to Chapter 11, which we will address right now...

Chapter 11:

This was originally intended only for large corporations but now individuals can file as well though to be honest very few do so..

When a business is unable to service its debt or pay its creditors, the business or its creditors can file with a federal bankruptcy court for protection under either Chapter 7 or Chapter 11.
In Chapter 7, the business ceases operations, a trustee sells all of its assets, and then distributes the proceeds to its creditors. Any residual amount is returned to the owners of the company. 

The simplest way to understand is to picture the famous Bain Capital from former Presidential Candidate Mitt Romney's past..

A company is bought on the down side.. '7' is filed and certain entities like the filer profit off the sales while the creditors recoup back pennies on the dollar, taking sizable losses

In Chapter 11, in most instances the debtor remains in control of its business operations as a debtor in possession, and is subject to the oversight and jurisdiction of the court.
In other words, the company or business continues to operate and function.  K-Mart and Sears are examples..

We won't go into too much more depth on this since our focus is personal not corporate bankruptcy.

Chapter 13:

For simplification purposes we won't focus on Chapter 12 here since '12' and '13' are basically the same filing, except that Chapter 12 is for family farmers and Chapter 13 is for other individuals. 

As long as you have a steady, reliable income, less than $269,250 in unsecured debt and less than $807,750 in secured debt, you can file Chapter 13.   
If your debt load was higher, in all likelihood you'd file as Chapter 11.

However, most people filing who do not do so under '7' do so here...

Once the filing is made, the debtor is assigned a trustee, with the two developing a proposal for a repayment plan. The court decides whether to accept or alter the plan or dictate another repayment plan altogether. 

Once the plan is decided upon, it can last anywhere from three to five years.
So why someone would file for 13 instead of Chapter 7. There are a few reasons for this:

1)   Under Chapter 13 filings, debtors do not have to liquidate their assets -- they actually get to keep everything, not just the items that meet the legal exemption.

2)   In most Chapter 13 cases, the debtor is repaying only a percentage of what he or she actually owes -- sometimes as little as 30 cents to 50 cents on the dollar.
In a way, we're quite fortunate in America to have this outlet to discharge debts...  

In places like Ireland and Spain, all debts stay with you forever (much like student loans for us) and in order to not be on the hook to repay, people have to leave their homeland to immigrate elsewhere.

There was also a time when debtors were thrown into prison..  This was the original purpose of establishing both the American colony of Georgia and the Oceania colony and eventual nation of Australia in the early 1700's
Of course, nothing is done for charity sake..  

The system makes money off one's financial successes via higher income taxes, etc..,  and it makes a hell of a lot of money off an individual's demise (attorneys, court costs, liquidators, etc..)

Unless something more important comes up in the news, our next posting will focus on some famous people who had to go through personal bankruptcy in the last decade, how they racked up their debts and how they got through it...