Understanding U.S. Bankruptcy Options
Connor Beckett McInerney
The U.S. economy is in high gear. Unemployment is low — historically so for several minority populations. Labor force participation is edging up, and long-stagnant wages are beginning to show new signs of growth. It’s the perfect time to talk about bankruptcy. Seriously.
We’re coming out of some dark financial days. As much as the last two years have brought positive financial gains to working Americans, the 10 years or so before that were pretty dismal. Unemployment and underemployment were rampant.
What was technically mostly a period of recovery was at best an anemic one. People struggled. Financial hardship was common for working folk.
For many, the debt hangover and financial carnage of this period remain. But their opportunities are now better. They have a better chance of a good — or at least full-time — job. The income side of the equation is looking up. The wreckage, however, won’t just go away on its own. This is why we should be talking about bankruptcy.
Types of Bankruptcy
Not all bankruptcies are the same. Individuals in the U.S. have two primary options (Chapter 7 and Chapter 13), although others are available in limited situations. State laws vary, and state-specific laws and rules must be considered in each individual’s own situation.
This isn’t generally a good time to try a DIY job. You’ll probably want professional help.
The fundamental difference between various types of bankruptcy is whether you are unable to pay your debt and want to liquidate and begin anew, or you might be able to pay under more favorable conditions and are looking for relief.
1. Chapter 7 Bankruptcy
A Chapter 7 bankruptcy allows for the discharge of debts. Your non-exempt assets are liquidated and the proceeds are used to pay your creditors. But any shortfall is discharged and you walk away without any consumer debt.
You will most likely still owe any outstanding taxes, fines, or school loans, though. These aren’t generally dischargeable debts.
The major criteria to qualify for a Chapter 7 bankruptcy is that you can’t afford to pay your debt at all. This is determined based on a formula, and if you have too much income relative to your debt, you’ll have to go Chapter 13 instead.
When you file for bankruptcy you get an immediate stay. Creditors can no longer hound you to pay them. They have to work through the court system.
Personal assets are generally exempt — you aren’t going to have to sell your clothes and dishes unless they’re worth an awful lot of money.
You may be able to keep a home or car if you’re current on your payments or manage to get back on track.
State laws will be a big determinant in many situations.
Chapter 7 is available to both individuals and businesses. However, businesses don’t use it often, since they typically aren’t looking to close the doors and liquidate. Sometimes they are, but more often they’ll look at Chapter 11.
And when it’s all done and your Chapter 7 bankruptcy is discharged, you’ll be free to begin anew.
2. Chapter 11 Bankruptcy
Chapter 11 is a reorganization. It’s generally used by businesses, but individuals can also use it in limited cases. It’s the most complex to file.
During a Chapter 11 bankruptcy, a court-appointed trustee oversees the financial operations of the organizations and helps establish a plan of action to pay some or all debt across time.
3. Chapter 13 Bankruptcy
Chapter 13 is similar to Chapter 11, but it’s explicitly for individuals. With this type of bankruptcy, you have a trustee who oversees how you use your money. It’s a reorganization in which you (through your lawyer) present a plan to pay off your debt — or a portion of it — over the course of a certain period, typically three to five years.
The plan may be to pay off all your debt, but under more favorable terms, or it may be to pay only a portion of your debt. This will depend on several factors, but mostly how much income is available for you to use to pay your debt.
You retain control of your assets. The only ones you might have to liquidate are secured ones, but you still often you keep those. That said, you’ll need to make sure they’re current and keep them that way.
In addition, the bankruptcy court has to approve your plan.
Creditors don’t have to do so, but it will be easier to get the court to approve a plan with the creditors in agreement. However, the courts do approve plans that the creditors don’t agree to if the court feels the plan is fair.
A Chapter 13 bankruptcy will take longer than a Chapter 7 one. After all, you’ll be operating through a trustee and the court system for the duration of your payment period. But it can be a viable option, and you can often significantly reduce your debt.
Beyond the Bankruptcy
People get into tough or impossible situations. Bankruptcies are often due to uninsured medical expenses. But there can be myriad reasons people get over their heads.
Bankruptcy laws are there to protect and help people. Typically, the situations that caused the problem are one-time occurrences. Once you’re clear of the debt, you’ll be able to go forward.
But there are some steps you should take immediately, such as beginning to rebuild your credit. Don’t wait. It may actually become harder if you wait. You’ll want to start working on a new positive credit history right away.
Every problem is also a potential lesson. We can learn what happened and how to prevent it from happening again.
Financial literacy is of paramount importance. There are lots of things we can do to help move us away from the brink. We don’t want to blow our fresh start. Learn what you can do to build assets and protect yourself. The more you know about managing money the better off you are. Sufficient knowledge and proper action can quickly put the past where it belongs — in the past.
The fresh start is there to help those who need it. Many people may be able to best capitalize on the opportunities of the present by shedding the anchor of the past.