Filing for individual bankruptcy, put simply, is a chance for people in a serious financial bind to start over.
At one time, there was a stigma attached to people who were forced to file for bankruptcy. They were looked down upon because, “You spent money you didn’t have and now you’re in big trouble.”
Individuals are the ones most often seeking help. They have taken on financial obligations like a mortgage, auto loan or student loan — or all three — and don’t have the income to pay for it.
Declaring bankruptcy will stop the badgering phone calls, letters and other attempts to contact and collect from you.
Legally, it’s referred to as “the automatic stay.” It means that creditors are prohibited from filing a lawsuit against you or entering liens against your property or constantly contacting you in an effort to get a payment on the debt. It also stops things like eviction, utility disconnection and wage garnishments.
According to debt.org, there were 844,495 bankruptcy cases filed in 2015 in the U.S., and 97 percent of them (819,760) were filed by individuals.
Most of the people filing bankruptcy were not particularly wealthy. The median income for the 819,760 individuals who filed, was just $34,392 and expenses were just $30,972.
Whether it was through bad decision-making or bad luck, lawmakers could see that in a capitalistic economy, those who failed deserved a second chance.
According to debt.org, the American Bankruptcy Institute (ABI) did a study of PACER stats (public court records) from 2016 and found that 95.5 percent of the 499,909 Chapter 7 bankruptcy cases decided that year were discharged, meaning the individual was no longer legally required to pay the debt.
Only 22,388 cases were dismissed, meaning the judge or court trustee felt like the individual had enough resources to pay his/her debts.
Individuals who used Chapter 13 bankruptcy, best known as “wage earner’s bankruptcy,” were about split in their success. Slightly more than half (166,424) were discharged and 164,626 were dismissed.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a chance to receive a court judgment that releases you from responsibility for repaying debts. You are permitted to keep key assets, considered “exempt” property, but “non-exempt property” will be sold to repay part of your debt.
Examples of exempt property include your home, the vehicle you use for work, equipment you use at work, Social Security checks, pensions, veteran’s benefits, welfare and retirement savings. These things can’t be sold or used to repay debt.
Non-exempt property includes things like cash, bank accounts, stock investments, coin or stamp collections, a second car or second home, etc. Non-exempt items will be liquidated and the proceeds used to repay lenders.
Chapter 7 is the most popular form of bankruptcy, making up 63 percent of individual bankruptcy cases in 2015.
Chapter 13 Bankruptcy
Chapter 13 bankruptcies make up about 30 percent of non-business bankruptcy filings.
A Chapter 13 bankruptcy involves repaying some of your debts to have the rest forgiven. This is an option for people who do not want to give up their property or do not qualify for Chapter 7 because their income is too high.
People can only file for bankruptcy under Chapter 13 if their debts do not exceed a certain amount.
Under Chapter 13, you must design a three- to five-year repayment plan for your creditors. Once you successfully complete the plan, the remaining debts are erased.
However, most people do not successfully finish their plans. When this happens, debtors may then choose to pursue a Chapter 7 bankruptcy instead. If they don’t, creditors then can resume their attempts to collect the full balance owed.
It is important to understand that while bankruptcy is a chance to start over, it definitely affects your credit and future ability to use money. It may prevent or delay foreclosure on a home and repossession of a car and it can also stop wage garnishment and other legal actions creditors use to collect debts, but in the end, there is a price to pay.
Bankruptcy carries some significant long-term penalties because it will remain on your credit report for seven to 10 years.
Buying a house, car
According to realtor.com, it is possible to finance a home after bankruptcy. Many lenders will consider applications if a bankruptcy has been discharged for at least two years, but it can go up to four or more. Filing Chapter 13 is looked upon more favorably because those filers are required to pay back some of their debt.
Auto dealerships may offer “guaranteed loans” for a new vehicle regardless of credit and bankruptcy. They work with several lenders to help make this happen. Caution is advised, however, because the interest rate on your new car loan may be higher than you may find acceptable.