Declaring Personal Bankruptcy

There are many reasons why people consider declaring personal bankruptcy. Unexpected medical bills, a job loss or difficult divorce can quickly put a strain on a person's budget. Money goes out faster than it comes in. Checks start to bounce, creating even more fees and debt. The spiral is overwhelming. But crisis is not the only cause of serious debt. Many young graduates enter the work force with high hopes and small salaries that just don't keep up with their spending habits. Some reach adulthood never learning to manage the balance between incoming and outgoing funds. Regardless of the reason, some people see their situation as hopeless and declaring personal bankruptcy the only option.

Personal bankruptcy falls under chapters 7 and 13 of the federal Bankruptcy Code, created to help individuals in extreme debt start afresh and creditors recover a portion of the amount lost. Most people are familiar with Chapter 7 bankruptcy, where the person declaring sells his or her possessions or property in order to pay back the amount owed. At the end of the settlement, the individual's debt is wiped clean, allowing him or her to start again with a fresh slate. This liquidation of assets usually takes about four months to complete before the debt is discharged. The problem is that many people declaring personal bankruptcy under Chapter 7 have little or no assets to sell to repay their debt. Plus if spending habits created the situation, debt simply returns several years later. On the other hand, Chapter 13 bankruptcy is less severe. In this case, debtors create a plan to repay a legitimate portion of the debt over a three to five year period. In exchange, the person filing can retain property and assets as long as payments are made in accordance with the agreement. Once either type of proceeding has been initiated, individuals are protected against lawsuits a creditor may issue, wage garnishments, or other legal action. Under Chapter 7, married individuals must file together while under Chapter 13, spouses can file individually.

People declaring personal bankruptcy must file through the district federal court system. Fees for filing are around $200 to $300 plus the costs of an attorney if the individual decides to hire one. Although hiring a lawyer can be expensive, they know the business and can help a debtor wade through the mountain of paperwork and court proceedings that are part of the process. Online services also exist for individuals who cannot afford attorneys. They do not provide advice as an attorney would, but assist with filing the actual paperwork involved. Required information includes a list of creditors, debtor's income, property values, and a detailed list of monthly expenses. In previous years, a judge would determine whether or a not a person could file. But recently, new laws have made it more difficult for people to file. In order to file Chapter 7, a debtor's income must be no more than 150% above the poverty level. This forces more individuals to file under Chapter 13. Other requirements, such as getting financial counseling, is also required before a bankruptcy is finalized. In either case, after an initial hearing, the court will appoint a trustee to handle the transactions including in the bankruptcy. If filing under Chapter 7, the trustee will manage the sale of items to repay debts. Trustees with clients filing under Chapter 13 are responsible for collecting the monthly payment from the debtor and issuing it to the creditors as outlined in the agreed plan.

The removal of debt demonstrates to us the grace of God. "Therefore is the kingdom of heaven likened unto a certain king, which would take account of his servants. And when he had begun to reckon, one was brought unto him, which owed him ten thousand talents. But forasmuch as he had not to pay, his lord commanded him to be sold, and his wife, and children, and all that he had, and payment to be made. The servant therefore fell down, and worshipped him, saying, Lord, have patience with me, and I will pay thee all. Then the lord of that servant was moved with compassion, and loosed him, and forgave him the debt." (Matthew 18:23-27)

However, declaring personal bankruptcy in our day does have its consequences. Applications for mortgages and credit cards will most likely be denied for a time. Employers also review the record of a potential employee to see if that person is financially responsible to hold the position. But filing won't automatically destroy a person's credit score. In most cases, a debtor's score is already low and won't drop once proceedings begin. In fact, just the opposite might occur. In many cases, after declaring personal bankruptcy, a debtor's credit score may actually rise. Creditors will not show a negative balance and will cease to report delinquencies. After 18 months, a debtor can apply for a secured credit card, making pre-payments to rebuild credit worth.

Filing won't erase all debts. Student loans, child support or alimony, as well as mortgages are all exempt from bankruptcy filings. Courts will also not erase debts that were incurred by providing false information to a creditor or that occurred from intentional harm. Most people would agree that declaring personal bankruptcy should only be used a final option. Financial counselors advise working with creditors to settle out of court. Many credits will reduce monthly payments or agree to accept a partial repayment before launching proceedings. Consolidation is another option. By consolidating several loans into one payment, debtors can often save money and keep their creditors happy. Some people are able to borrow money from friends or family until they able to get back on their feet again. Others might be able to withdraw from retirement funds to ease the current financial pressure.

If no other option is available and declaring personal bankruptcy is the only choice available, it is not the end of the world. In many cases, people have recovered from their debt crisis and have been able to establish solid credit records.

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