Hard Years Lead to an Uptick in Bankruptcies

May 27, 2011

In response to the steep rise in bankruptcy filings in 2005, changes were made to the bankruptcy code that reversed the trend, at least temporarily. But, pounded by five years of high unemployment and low real estate prices, the number of Americans seeking protection in bankruptcy courts has again reached uncomfortable heights.

Although the economy may be recovering, many Americans are still facing the challenges of heaping debt. Some 1.53 million Americans filed cases in bankruptcy court last year. Bankruptcies increased 9 percent in 2010, even surpassing their 2005 levels in some areas: in Phoenix, 2010 was a record high year for bankruptcy filings for both businesses and individuals.

These high numbers come as little surprise: the recession hit everyone very hard. For those who are in over their heads financially, understanding the nuances of bankruptcy can be the first step towards getting back on track.

Understanding Bankruptcy Options

For the average U.S. citizen, there are two primary types of bankruptcy: Chapter 7 and Chapter 13. Each kind of bankruptcy has drawbacks and advantages, and which one may be right for you depends on a variety of factors.

Chapter 7 bankruptcy involves a liquidation of assets. This means that property of value is sold (certain exempt property, however, may be retained). Chapter 7 bankruptcy can completely eliminate most debts that are unsecured. Creditors are automatically barred from contacting you during your Chapter 7 bankruptcy case, and are also not allowed to contact you after your debts have been discharged.

Chapter 7 cases are generally wrapped up much more quickly than their Chapter 13 counterparts; they can usually be completed in a matter of months. While Chapter 7 bankruptcy does mean you will be essentially free and clear of most types of debt at the end of the process, it is certainly not for everyone.

Although there is no minimum debt level required, you must qualify for Chapter 7 bankruptcy under the means test, which is a formula applied to criteria such as debt level, income, and assets. Even if you do qualify, Chapter 7 is not always the best option; it is most common among those with little property who do not have a steady income or otherwise have difficulty covering standard periodic expenses.

Chapter 13, on the other hand, has significant advantages for those with large amounts of equity accumulated in property that they would like to retain. Chapter 13 bankruptcy is more common among those who are not able to keep up on debt payments, but who have a regular income high enough to cover living expenses.

A Chapter 13 bankruptcy case involves the development of a plan aimed at making installment payments to creditors over a 3 to 5 year period. In many cases, consolidating debts in bankruptcy court means lower payments. Those who file under Chapter 13 also receive certain protections: for example, there is no direct contact with creditors during the repayment period (one monthly payment is made to a bankruptcy trustee for distribution), and, importantly, filing under Chapter 13 can stop foreclosure proceedings (mortgage payments under the repayment plan must still be made on time, however, in order to keep a residence).

Some debts may be completely discharged at the end of the 3 to 5 year repayment period, or if the court grants a hardship discharge. Chapter 13 bankruptcy is a more flexible option that allows a debtor to work out an individualized plan. It allows debtors to keep their property, and also provides some protection to cosigners. However, to be eligible for Chapter 13 bankruptcy, an individual must have unsecured debts of less than $360,475 and secured debts of less than $1,081,400.

Although both Chapter 7 and Chapter 13 bankruptcies may involve discharge of some debts, it is important to note that not all types of debt can be eliminated. Debts for certain taxes, student loans, and obligations arising out of divorce or separation (like child support or alimony) are examples of debts that survive a Chapter 7 proceeding. A wider variety of debt types can be discharged under Chapter 13, but certain obligations (including student loans and child support) cannot be eliminated.

What to Do When You Are Struggling With Debt

If you are struggling financially in this tough economic climate, bankruptcy is one option to consider. The first step is arranging a consultation with a qualified bankruptcy attorney. Your attorney will be an advocate and advisor who can help you decide how to best weather your individual financial crisis.

If that means filing for Chapter 7 or Chapter 13 bankruptcy, your attorney will be able to guide you through the process as painlessly as possible and act as your voice in court to ensure a bankruptcy arrangement that works for you. Going through a bankruptcy can be a stressful experience that will have a real impact on your life for years to come. But, with the right attorney, you can move forward and be on the way to a more solid financial future.

Article provided by Farnsworth Law Offices
Visit us at www.azbk.com