Many people are divided in opinions about bankruptcy. Some think that bankruptcy is a legal way to cheat creditors out of their money. Some think that bankruptcy is the result of mismanagement and indicates some fault or wrongdoing on the part of a person that files for bankruptcy. Some, especially those that have received the benefit of the legal protections from creditors offered by the bankruptcy code, are thankful that they were able to start over.
The truth is that bankruptcy, like many things in life, can be used and abused in all the ways mentioned above. But whether the bankruptcy code is used by some people motivated by wrong reasons, or a consequence of careless credit habits, or the last resort of desperate, hard working, honest people in financial trouble due to circumstances no fault of their own, bankruptcy is a very necessary component of modern economics and essential to the business community at large.
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Without some form of relief from overwhelming debt, alternatives, whether literal prison or the brutal choice of either buying food or paying a debt, the consequences to society are counter-productive. Firstly, the economic costs of imprisoning a bankrupt would be enormous. Secondly, a creditor would not likely receive payment on a debt while the debtor is in prison therefore, the creditor goes unpaid anyway. And finally, if the consequences of defaulting on a debt were either imprisonment or starvation, the credit industry in modern society would not exist.
The fact is that bankruptcy is as important to creditors as it is to those debtors that need relief from their creditors. Bankruptcy gives the debtor the chance to rebuild shattered financial circumstances. Once a bankruptcy petition is filed, creditors can stop paying obnoxious jerks to make phone calls to the debtor trying to squeeze dollars from people that don't have dollars (what part of "BROKE" don't they understand?).
Creditors now know what their remedies are. If they think there is something nefarious about the schedules or financial statements contained in the debtor's petition, they can attend the creditor's meeting and question the debtor or file an adversary proceeding against the debtor to recover their debt. Moreover, thanks in large part to the ability to elect bankruptcy protection in case of emergency, and its reassurance that a default will not end up in prison or rags and homelessness, there are lots of other people out there willing to assume debt and from whom creditors can sell their products.
There are three kinds of Bankruptcy that apply to most people. These are called Chapters. They are Chapters 7, 13, and 11.
Chapter 7 is the smallest, easiest and least expensive type. A Chapter 7 Bankruptcy will discharge all debts that can be discharged almost immediately. All secured creditors (mortgages, car payments, lease or rent obligations) must be current if you want to keep the house, car, or stay in the premises.
Most credit card accounts will likely be closed, even if you are current with the payments and even if you have a zero balance. If you want to keep a credit card that has a zero balance, the best thing to do is to call the issuing card company and explain that you are going to file a Bankruptcy petition due to circumstances, but that you would like to keep that account.
There is no law that compels a credit issuing entity to keep the account open or to close it but most credit issuing companies have a policy of simply closing the account. However, in some cases, a credit card account may survive the Bankruptcy.
For the most part, after filing a Chapter 7 Bankruptcy, a cash and carry policy must usually be adopted while improving the financial situation and then re-establish credit gradually. Improving credit scores can easily be done and usually takes a couple years.
Chapter 13 is a bigger, longer, and more expensive type of Bankruptcy and is often times avoided by debtors, but can benefit those that do not qualify for a Chapter 7. There are some things that can be done in a Chapter 13 that cannot be done in a Chapter 7. These things can make the Chapter 13 an attractive option in spite of the extra time and costs.
These things include:
(1) Lien Stripping - In some cases, if the value of the home is less than what is owed on the 1st mortgage a homeowner may be able to "strip" the junior liens in a chapter 13 (which are the 2nd and 3rd Trust Deeds).
(2) Curing Mortgage Arrears - In a Chapter 13, if the finances of the debtor have improved but not sufficiently to cure the arrears in time under an acceleration clause on the mortgage, the debtor can have up to 5 years to cure the arrears if he can manage the Chapter 13 plan payments as well as the regular monthly mortgage payments and ordinary expenses. Moreover, the debtor will not have to pay any of the other dischargeable debts (i.e., credit card bills, medical bills, etc.), during the Chapter 13 plan period.
(3) Tax problems - A Chapter 13 can be an attractive option to stop penalties and interest on non-dischargeable taxes (i.e., income taxes that are not yet old enough to discharge, or employer payroll taxes unpaid during the operation of a business, etc.).
Lastly is the Chapter 11, which is referred to as a business reorganization Bankruptcy and is the least common of the 3 Bankruptcies. However, some individuals that have secured or unsecured debt amounts that exceed the Chapter 13 limits may have to consider a Chapter 11 to manage and discharge debt.
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