Bankruptcy? Don't Get Messy With It
Michael Russell
Despite the serious short term and long-term effects associated with filing bankruptcy, the number of people filing bankruptcy lately has been on the increase. It is estimated that 5.4 people out of 1000 filed for bankruptcy last year and that this rate has been growing at an average of 7%. The alarming ease with which people file for bankruptcy is a growing cause of concern for governments and financial organizations.
What is Bankruptcy? The word, Bankruptcy, means 'broken bench', literally. In the past, during the early days of banking and trading, when a debtor could not pay off his debts, his workbench was broken into two as a punishment and also as a warning for other debtors. But in recent times, the term is now used as a legal tool to help an individual or business discharge its burden of debts without been swallowed up by it. It is now a legal term, meaning that an individual cannot, within reason, pay off his various debts and has allowed the court system to take over his finances for the purpose of easing off his debts.
Bankruptcy laws were enacted in order to protect both debtor, and creditor. The laws were enacted to provide equal and fair measures to satisfy the objectives of all parties. The primary purpose of the laws of bankruptcy can be split in two:
- To give an honest debtor a fresh start in life by relieving him most of his debts
- To repay creditors in an orderly manner to the extent that the debtor has property available for payment.
Several studies over the years have shown that the primary cause of personal bankruptcy is uncontrollable levels of consumer debt which in most cases is coupled with an unexpected event, such as a major medical expense not covered by insurance, the loss of a job, divorce or death of a spouse. According to economists' surveys, the classic bankruptcy filer is a blue collar, high school graduate who is the head of a household in the lower middle-income class with heavy use of credit.
Different types of bankruptcy exist in different localities and countries, defined by legal codes for certain purposes. The exact types of bankruptcy available differ from one country to the next, in the United Kingdom for example; bankruptcy can only legally be applied to individuals and partnerships, whereas in the United States and Canada, it can be applied to businesses as well.
There are two basic structured plans for filing personal bankruptcy, these are known as Chapter 7 and Chapter 13. The chapter 7 plan requires debtors to liquidate all non-exempt assets, such as retirement programs, and have them distributed among his creditors, while the Chapter 13 plan does not require liquidation. In this plan, the debtor concedes to a payment arrangement where a portion of his unsecured debts are paid and the balance forgiven. Most personal bankruptcy filers chose the chapter 7 option.
When filling for bankruptcy, you will need the services of a Bankruptcy lawyer, and getting an experienced lawyer who has handled cases similar to yours may be an important first step. When you have filed for bankruptcy, the court will normally appoint someone to work out the payments to your creditors and to determine how much of your income must go into repaying these debts. The court will either allow you to make payments, or more likely, will deduct a portion of your pay check toward this goal. And during this process one of the primary side effects is that your credit options will be very limited, due to both legal action and the reluctance of creditors to issue credit lines to individuals who have declared bankruptcy. Although, once the amount set by the court has been paid off, the bankruptcy will be cleared and you will be able to start rebuilding your credit from the start again. It may be years before creditors start trusting you after declaring bankruptcy. If you rebuild you credit well enough, it probably won't take too long, but certainly, for a couple of years you are not going to be credit worthy.
Because of the lasting effects of filing bankruptcy, it is advisable to only declare bankruptcy as a last resort. Try out every other alternative, talk to an experienced lawyer and see if there are options to be considered before declaring yourself or your business bankrupt. In most cases, there are always better alternatives to be considered.
- You could sell off some assets to clear your bills when you notice that you are getting financially trapped and may be running into trouble.
- Reduce your expenses and cut out all non-essential costs.
- Consult with a specialist, e.g. an accountant, maybe you could work out a plan to enable you gradually pay off your debts without been swallowed by it. A good budget, when strictly adhered to, could pull you out of a terrible situation in no time.
- You could also consider refinancing some assets and using the surplus to pay off your debts.
- You could also arrange something like a Creditors' pool. Here you will need to arrange with all your creditors to create a pool run by an accountant, where you pay a certain amount of money into the pool as arranged and the money is distributed to your creditors until your debts are paid.
If none of this works, then you could consider filing for voluntary bankruptcy to stop the situation from getting too bad. The bottom line is, don't jump into this mess called bankruptcy, until you have convinced yourself it is the only option left.
Michael Russell
Your Independent guide to Bankruptcy
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