Bankruptcy. By Mrs. Lauer

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Nicholas Michael Russell
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1 Bankruptcy By Mrs. Lauer

2 Objectives Consider the advantages of disadvantages of declaring bankruptcy. List types of debts that are discharged in bankruptcy. Distinguish between straight bankruptcy and wage earner bankruptcy. Discuss services a bankruptcy lawyer may provide.

3 Why Bankruptcy? Bankruptcy is designed for people caught in severe financial circumstances beyond their control such as illness or loss of a job. It gives people with excessive debt an opportunity to make a fresh start by reducing or eliminating the debt. While some debts will be eliminated, others such as alimony and child support will not be discharged.

4 Why Bankruptcy Cont. Bankruptcy is a constitutional right. If the court grants the petition for a person or business to file for bankruptcy, a trustee divides the debtor s property and pays each creditor as fully as possible. The bankruptcy procedure can temporarily prevent creditors from actions such as foreclosure on a home or repossession of a car. It can also stop: Wage garnishment (employers withholding your pay in order to pay debt) Debt collection harassment Disconnection of utilities (heat, air conditioning, water, etc.)

6 Disadvantages of Bankruptcy Bankruptcy information remains on a credit report for 10 years. A negative credit report can make it difficult to make major purchases, buy a house or rent an apartment. Future lenders know that people have declared bankruptcy have difficulty paying debts and may regard them as poor credit risks.

7 Disadvantages of Bankruptcy Cont. People who are considered poor credit risks must often pay higher interest rates or use a secured credit card for loans and large purchases. Bankruptcy causes feelings of guilt and embarrassment due to the social stigma associated with the inability to manage one s finances.

8 The Bankruptcy Decision Only consider bankruptcy if most or all of the following apply: If all attempts to control spending and credit use have failed, even with the help of a credit counselor or debt-consolidation plan. If the debtor is unable to meet debt obligations on his/her current income. If attempts to set up repayment plans with creditors have not worked out. If the ratio of debt to annual income is high (meaning 40-50% or more).

9 Whether To File or Not Factors to consider when deciding to file for bankruptcy or not include: The total amount of debt The willingness of creditors to wait for payment The borrower s financial circumstances

10 Dischargeable Debts A bankruptcy discharge means that the debtor no longer has any obligation to repay the debt. Examples include: Rent Utility bills Deficiency balances (the difference between the amount you owe and the value of the property) Credit card debt Legal, medical & accounting bills Newspaper and magazine subscriptions Department store and gasoline company bills Loans from friends and relatives

11 Non-Dischargeable Debts The following debts may NOT be discharged through bankruptcy proceedings. Examples include: Alimony & child support Some student loans Certain federal, state and local taxes Debt from fraud, larceny & theft Fines & penalties for violating the law, like traffic tickets Luxury goods and services purchased within 60 days of filing for bankrupcy, with a value of $1,000 or more Debts not listed on bankruptcy papers

12 Exempt Property Exempt property is property you are allowed to keep after bankruptcy. Examples include: Home equity up to $15,000 Disability & unemployment benefits Life insurance policy, loan up to $8,000 Alimony, child support Qualified retirement benefits Personal property such as clothing, household goods up to $400 per item, $800 total Public benefits such as social security & public assistance Tools of the person s trade such as books and computers up to $1,500

13 Non-Exempt Property Property that MAY be used to pay debts when you file for bankruptcy: Cash & bank account balances Stocks, bonds & investments Equity in a house, above $15,000 Luxury items such as fur coats, jewelry, coins & stamps Family heirlooms Second house or motor vehicle Musical instruments, unless a person is a professional musician Private pension plans

14 Chapter 7 Bankruptcy Straight Bankruptcy Used by individuals with no steady income and few assets Most personal bankruptcies are filed under Chapter 7 It eliminates most debts but also requires immediate liquidation of most assets Once you declare for Chapter 7 bankruptcy, you cannot file for bankruptcy again for at least six years.

15 Chapter 13 Bankruptcy Wage Earner or Regular Income Plan Used by people with regular incomes and less debt than $250,000 in unsecured debt and less than $750,000 in secured debt. Unsecured debts include: credit and charge card purchases, medical & dental bills, rent and loans from friends. Secured debts include: home mortgage loans & vehicle loans

16 Chapter 13 Bankruptcy Wage Earner or Regular Income Plan Cont. The Chapter 13 process recognizes rather than liquidates the debtors assets. When a debtor files under this plan, a debt repayment plan is designed to pay off as much of the debt as possible, usually within 3-5 years, under close supervision of the bankruptcy trustee. The trustee requires that the debtor maintain a strict budget and no new credit can be obtained without approval. There are no time limits for how often a person can file under Chapter 13 protection.

17 Bankruptcy Procedures After deciding which type of bankruptcy to use, forms are available at the local bankruptcy court. The filing cost is usually around $ and is paid at the time of filing. Generally, the entire procedure will take 4-6 months to get approval of the plan by the court.

18 Summary Remember filing bankruptcy is an absolute LAST resort when trying to get one s finances back in order. A person should only file or bankruptcy if all attempts to control spending and credit use have failed, even with the help of a credit counselor or debtconsolidation plan. Bankruptcy does not resolve all debts. The main two types of bankruptcy are Chapter 7 and Chapter 13.

Presentation Slides. Lesson Nine. In Trouble 04/09

Presentation Slides. Lesson Nine. In Trouble 04/09 Presentation Slides $ Lesson Nine In Trouble 04/09 why consumers don t pay loss of income (48%) Unemployment (24%) Illness (16%) Other (divorce, death) (8%) overextension (25%) Poor money management Emergencies