Credit Crunch: Bankruptcy

There are steps you can take before you declare bankruptcy. Contact a debt counselor in your area who will go over your credit-card and other debts and help you work out a plan that will hopefully enable you to avoid declaring bankruptcy.

You may also want to head over to your public library and check out the books on filing for bankruptcy. Don't necessarily depend on websites as the quality of the information on the internet can be inconsistent. You should know what you're in for if you go this route and the last thing you need is to get the wrong info.

There are different kinds of bankruptcy and, because the law is very detailed, this article only deals with generalizations.

Some definitions:

Liquidation Bankruptcy, also called Chapter 7: In this process you would ask the nearest bankruptcy court to wipe out all the debts you owe. But even under Chapter 7, not all your debts will be eliminated. In exchange for discharging all your debts, you will be asked to give up something... in fact, your nonexempt property will be sold (hence the name liquidation bankruptcy) and the proceeds used to pay your creditors.

Reorganization Bankruptcy, also called Chapter 13: This procedure is available for consumers with debts under $1 million. (Owners of family farms file for Chapter 12, and businesses or consumers with over $1 million in debt file for Chapter 11.) You must file a specific and detailed plan with the bankruptcy court, spelling out exactly how you will repay your creditors over time. You are not required to sell your property to pay off creditors, as you are in Chapter 7.

When you file for Chapter 7 or Chapter 13, something known as an "automatic stay" kicks in. This stay legally stops all collection efforts by your creditors and puts an end to those harassing phone calls you may have been receiving. It also prevents garnishment of your wages. And, it protects you from being evicted from your house and from the IRS foreclosing or repossessing your property.

Some debts cannot be discharged. Neither Chapter 7 nor Chapter 13 will let you completely off the hook. You still must pay:

  • Alimony
  • Child support
  • Debts for personal injury or death caused by drinking and driving
  • Fines for violating the law, including traffic tickets
  • Students loans for which the first payment was due within the past seven years; i.e., student loans that are less than seven years old
  • Taxes -- recent income taxes (usually within the last three years) and possibly other tax debts
  • Debts for fraud

As I mentioned, under Chapter 13 you do not lose any property, but Chapter 7 is a different matter. Here you will be given a list of property you are eligible to keep. The list is either a state exemptions list or one spelled out in the federal bankruptcy code. You pick the one you want. (Most people select their state exemptions list if it's more lenient.)

Exemptions vary from state to state, so check with a lawyer in your state for specifics. In most cases, exemptions include: some of the equity in your primary residence; insurance coverage; pension and retirement plans; clothing; furniture; household goods and other personal property. However, luxury items are rarely exempt. Checks received from Social Security, welfare and unemployment are exempt. If you need certain tools and equipment for your job, you're allowed to keep them.

In general, you can keep your house under both Chapter 7 and 13, but only if you continue to make the required monthly payments. But, you may also be asked to pay down some portion of delinquent payments.

If you decide to file, check with a bankruptcy attorney in your state to find out if it has what's known as a "homestead exemption," allowing you to keep some equity interest in your home, even if it's sold. The dollar amount you can shield from creditors varies widely from state to state. An exemption is just that: a specific dollar amount that is exempted or protected from creditors. It does not shield your entire house.

Most people who file for bankruptcy (and over a million do every year) file for Chapter 7. But there are some good reasons to go for Chapter 13: in particular, if you own some very valuable property that is non-exempt, such as a vacation house, for example. If you're behind in your mortgage or your car payments, Chapter 13 lets you keep this property.

A bankruptcy stays in your credit file for seven to 10 years, making it difficult to get a credit card, get a mortgage, buy a car, rent an apartment, or get an education loan.

Bankruptcy is not a given -- a bankruptcy judge can dismiss your filing if he or she thinks you are indeed able to pay off your debts. Hopefully you will not be forced to file for bankruptcy, but if you do, you'll be in good company. One of the earliest-known bankrupts was Edward II, king of England in the 14th century. He passionately wanted to rule France, resulting in the Hundred Years' War. The cost of the venture put him 30 pounds in debt, a huge amount back in 1340.

Other famous bankruptees include:

Abraham Lincoln
Andy Gibb
Benedict Arnold
Bjorn Borg
Bob Guccione
Buffalo Bill
Burt Reynolds
Chaka Kahn
Cyndi Lauper
Debbie Reynolds
Dino De Laurentiis
Don Johnson
Donald Trump
Eddie Fisher
F. Donald Nixon
Francis Ford Coppola
Frank Baum
Gary Coleman
George McGovern
H.J. Heinz
Harry Nilsson
Henry Ford
Isaac Hayes
Jerry Lewis
John Barrymore
John DeLorean
John James Audubon
Johnny Unitas
Kim Basinger
La Toya Jackson
Lawrence Taylor
Lenny Bruce
Leon Spinks
Lorenzo Lamas
Lynn Redgrave
M.C. Hammer
Mark Twain
Marvin Gaye
Meat Loaf
Mick Fleetwood
Mickey Rooney
Mike Tyson
Natalie Cole
Nikola Tesla
P.T. Barnum
R. Buckminster Fuller
Randy Quaid
Rembrandt
Richard Harris
Run DMC
Stan Lee
Tammy Wynette
Ted Nugent
Tom Petty
Toni Braxton
Ulysses S. Grant
Walt Disney
Wayne Newton
Willie Nelson

Hey, if entertainment super moguls like Walt Disney, Dino De Laurentiis, Francis Ford Coppola, and Stan Lee can go bankrupt, so can you!

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