Merry Christmas

I have been quite busy the last few weeks and consequently have been neglecting my responsibilities to our readers.  For that I apologize.  Christmas is quickly approaching, and this time of year people tend to put off the consideration of Bankruptcy.  I can understand why people dont choose to file in December particularly the end of December but I do caution those readers who are going to be filing in the next few months.

It is immoral and also a violation of the bankruptcy code itself to charge Christmas presents with the intent to file in the future.  Many attorneys will say some thing like "you just have to wait 90 days," but this isnt entirely accurate.  It is true that the look-back period is 90 days for non-insider transactions like credit card charges however there are exceptions.  More importantly if you dont intend to pay the money back at the time you charge it you are committing fraud and that is non-dischargeable and quite frankly morally bankrupt.  

So celebrate the holidays, shop all you want but keep in mind the best course of action is to only buy stuff you can afford.  (This is true whether you plan to file or not).  

Merry Christmas and Happy New Year.  

And if you are shopping or just feel like supporting this site you might consider buying one of these fine books from Amazon.com.

                            

Government Shutdown

I have been asked about the effect of the shutdown on Bankruptcy relief.  The long and the short of it is it depends.  United States Attorneys offices are closed or operating on limited staff.  The same is true with some Bankruptcy Courts.  The others are operating on emergency funds in their budgets.

So far no wide spread delays or other problems of that nature have arisen however as time progresses it will be increasingly more difficult on Bankruptcy filers and the people who service them.  For now we should all hope for a speedy resolution of the problems in Washington.

Ill post more as I learn it.  Feel free to comment if you have any first hand observations to share.  

Are Amendments Perjury?

A blog that I follow recently posted an interesting article on this topic which I think may be useful to you.  I am not ready to take a strong opinion on this issue either way but I think before one files incomplete or otherwise inaccurate filings one should consider the possible consequences of those skeletal filings and the subsequent amendments that will be necessary.  For more on this check out the article that brought this issue to my attention.

Just one more reason to make sure you have good information before you decided whether to file or not.  

Bankruptcy Myths Part 3 of 3 (revisited)

This is the final installment of a 3 part posting on some common myths about Bankruptcy.  These were previously posted but I thought it might be helpful to revisit them so I have posted them again here.

Myth #8: I don’t Owe Enough, or I Owe Too Much to File Bankruptcy

The simple fact is that there are no limits to the minimum and maximum amounts of debt a person can have and still file for Bankruptcy.  Technically a person could file if they owed only 1 dollar, of course this would be a very bad idea when you consider the costs involved.  The Court costs alone will greatly exceed this amount, with the typical filing fee being a couple hundred dollars.  However the reality is that peoples circumstances are different and while a person making $100,000 dollars a year or more wouldn’t usually file over five to ten thousand dollars a person on a fixed income taking home less than $12,000 dollars a year almost certainly would have no other choice.  It is all relative, and recognizing this, the Congress has not placed absolute limits on debt amounts in the Code. (There are a couple of technical exceptions for very high debt amounts, but even in those circumstances they don’t prevent filing out right, they just effect the debtor’s eligibility for particular chapters of the code). 

Myth #9: I Make Too Much or Too Little to File for Bankruptcy

This myth is similar to the last one it’s all relative.  However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 did place limits on income that can act in some circumstances to prevent high income people from selecting to file a Chapter 7 Bankruptcy, nothing precludes them from filing another form of Bankruptcy such as a Chapter 13 Bankruptcy.  I take a closer look at the Bankruptcy Abuse and Consumer Protection Act in the section of my book entitled a “Brief History of Bankruptcy,” and I deal specifically with the issues regarding Chapter Selection in the section of the book entitled “Types of Bankruptcies/Choosing the Right One for You.” 

Myth #10: If I File It Will Destroy My Husband or Wife’s Credit

Nope, nothing in the Bankruptcy Code requires a person to file with their spouse, or even tell their spouse that they are filing.  As we well know not all people are 100% truthful with their spouses about their financial situation.  I have had this issue come up at least a couple of times a year since I started doing Bankruptcy work.  The truth is it is possible to file without telling your spouse and in fact you probably will be able to prevent them from ever knowing about it, assuming they don’t pay much attention to your finances.  However I don’t recommend it.  In fact, in my practice I wouldn’t do it.  I know some attorneys who have done this type of thing but it’s really not a good idea.  That being said, I often have filed for one spouse or the other so that they can eliminate all or most of their debt and yet still have one person in the relationship with really good credit.  This technique can be quite useful in certain circumstances.  The particulars of this are a bit advanced for this book.  I would suggest that you consult a good Bankruptcy attorney who is well trained and familiar with the law before considering this type of individual filing. 

The general rule is if you don’t file it doesn’t affect your credit. This means no negative hit to the credit report, but also means that in the case of joint debts the person who files may not have to pay, but the person who didn’t file still does. 

For more information about this issue and many more buy the book.  

Bankruptcy Myths Part 2 of 3 (revisited)

Myth #5: If I File It Will Be Harder to Get or Keep a Job 

The good news is that there are strict rules in the Code that prevent this type of discrimination.  Just like it’s illegal not to hire someone based on race or religion it is also illegal to discriminate against someone in the hiring process based on a past Bankruptcy filing.  I deal with this issue and many similar issues in greater detail in the section of my book entitled “It’s Not as Bad as You Think.” 

Myth #6: You can’t Get Rid of Medical or Tax Debts?

In general most types of debt are dischargeable, meaning that you can get rid of them.  There are virtually no exceptions to this rule that result in preventing a person from discharging medical bills or medical debts.  Taxes are a bit trickier for sure but also can be discharged in the right circumstances.  This topic will be more fully dealt with in the section of my book entitled “What’s a Discharge and How does it Work?” 

Myth #7: I Should Max Out My Credit Cards Because When I File I Won’t Have to Pay Anyway 

Not so fast…This one is a big no-no.  Don’t do it, its fraud, its stealing and it just ain't right.  Seriously if you cards are maxed already ok we can deal with that, but don’t ever charge something or borrow some money with the intent not to pay it back.  It really wouldn’t be right but on top of that it’s criminal.  Not to mention the fact that you won’t get away with it anyway.  There are strict rules that prevent this type of behavior.  We will cover this and couple of other things you should avoid in the section of my book entitled “What can go Wrong and How to Avoid it.” 

For more information buy the book. 

Bankruptcy Myths (revisited)

In my book I cover a number of common misunderstandings about bankruptcy.  Below I go into some of the most common misunderstandings about bankruptcy.

Myth #1: Only Losers File for Bankruptcy

This is perhaps the biggest myth and is probably the most common belief among the general public.  The reality is that millions of people file every year.  Many of these people are doctors and lawyers.  Many of these people are normal regular hardworking individuals.  In many cases a person is forced to file due to things completely out of their control. 

Myth #2: People Who File for Bankruptcy Lose Everything They Have

Almost every day in my practice I heard somebody say “I really don’t want to file because I need my car to get back and forth to work,” or “I need your help but I can file Bankruptcy because I can afford to lose my home, it would devastate my children.”  

The good news is that you don’t have to lose your house, cars, furniture, collectables, photo albums, jewelry, or even you dog.  In most cases, my clients have been able keep everything.  Obviously there are limits to what a person can keep in Bankruptcy, but for most people these limits are quite generous.  I cover this in much more detail in my book, "Should I File: A Definitive Guide to Bankruptcy," in the section entitled “What Can I Keep?”  

Myth #3: If I File My Credit Will Be Destroyed Forever 

Most people believe this one.  My experience is that many attorneys even believe this one.  However it is simply not true.  First of all, the Fair Credit Reporting Act specifically limits the timeframe in which a Bankruptcy appears on your credit report to ten years.  This means that ten years and one day after your discharge the Bankruptcy will have no more effect on your credit.  The good news is that there is no need to wait that long.  Many people whom I have worked with have gotten credit cards and even mortgages with a year or less after filing for Bankruptcy.  How this works and what you should do to rebuild your credit is covered in detail in my book in the section entitled, “OK I filed, What do I do Now?”

Myth #4: If I File All My Friends Will Find Out

For some reason this myth just will not go away.  Lots and lots of people whom I have dealt with have expressed fear and anxiety over people finding out that they filed.  And while we will deal with this issue in much greater detail a little later on, I think it is important for you to know that in many case in fact in most case the only people that ever find out about your bankruptcy are those people you told about it.  In fact it is very likely that someone you work with or a close friend of yours has filed and you don’t know about it.  If they can get away with it so can you.  This myth is covered more fully in my book in the section entitled “Everyone is Doing it Maybe You Should Too”

I hope that you enjoyed this preview of my book.  I will be posting more myths in a few days.  If cant wait these myths and many more are covered in my book.  for more information about my book click below.

                                                                     

Kindle Version is Now Available

A new lower cost option is now available for purchasing my book.  You can buy it for your kindle for only $6.49 by going to Amazon.com or by click the link here  Buying the electronic version will save you over 50%.  

Check it out.  And make sure you let me know what you think.

Detroit Files Chapter 9 Bankruptcy

The news coming out of Detroit interesting from a political perspective but it is not particularly relevant for this site.  So might wonder why are we covering it at all?  The answers is that it highlights the complexity of the Bankruptcy code.

Detroit News article

Detroit Files Chapter 9 Bankruptcy.  What the heck is that?

The short answer is its a municipal bankruptcy which are governed by chapter 9 of the US Bankruptcy code.  The other more common examples are Chapter 7 (Liquidation) Chapter 13 (individual reorganization) and Chapter 11 (business reorganization).  The less common ones like chapter 9 also include chapter 12 which is a family farmer reorganization.

There really is no need to go into too much detail about these but we thought that this recent filing was a good time to refresh on the different chapters that are available.  As always more on this topic can be found in the book.  Which you can buy off this site or on Amazon.com

I just noticed on Amazon that they are currently discounting the book.  You can now buy a new copy for less than 14 bucks.  

I have no idea how long this sale will last but it seems like a great time to buy it.  Just click the box above

Multiple Bankruptcies, Or when can I file again?

Hopefully those of you who have filed for Bankruptcy will not find yourself in the position where you need to file a second or third time but unfortunately it does happen and it happens more often than you may think.  Sometimes its a result of poor planning but more often than not its a function of reality.  Bad stuff happens and people with less resources are more likely to be unable to weather the storm.  

Technically speaking there is no minimum time frame between bankruptcies.  However there are limitations regarding the usefulness of filing.  The end goal of most bankruptcies is a discharge of the legal obligation to pay one's debts.  Unfortunately if you file to soon you run the risk of not being able receive the discharge you desire.  

I will summarize the rules here for your benefit but keep in mind that some issues (and this is one of them) are best answered by an Attorney.  The best thing you can do is make sure you hire a good attorney who can look at you individual situation and determine the best course of action for you.  In order to find the right attorney for you it is important that you develop a general understanding of the law so that you can assure you have a knowledgeable attorney in the field.  For more info on this check out my book by clicking here.  Or you can buy it on Amazon.com 

General Guidelines are as follows

Successive Chapter 7 cases need to 8 years apart

Successive Chapter 13 cases need to be at least 2 years apart

It is more complicated if you change Chapters (ie file one of each)

After a 13 in which you recieved a discharge you need to wait at least 6 years to file a 7 unless you either 

1) paid all creditors in full in the 13 or

2) you paid at leas 70% and it was you best efforts and in good faith

If you filed 7 first then you need to wait at least 4 years to file the 13

As I said it can be complicated so check out my Book and get a good attorney.  

Should You Buy and Read the Book?

A number of people have asked me some variation of the question "How do I know that your book is right for me?"  The answer generally is that if you are asking that question it probably is at least somewhat helpful for you.  I haven't posted on this topic on this site in a while so I thought it might be helpful for me to expound upon this issue a little by reproducing a section I previously wrote about the book.  Which as always can be pruchased how Amazon.com or by clicking one of the various links to the book found on this site.  (just so you don't have to search you can click Here) Anyway here it is...

            This is not a do it yourself bankruptcy book.  This book is for people with questions about bankruptcy.  It is designed to help the reader gain a general understanding about the bankruptcy process with the hope that this understanding will alleviate some of the stress of dealing with issue.  By reading this book you will gain valuable information that will help you make intelligent decisions about bankruptcy. 

There are plenty of do it yourself bankruptcy books on the market.  Unfortunately, these books fall short.  The do it yourself books do little more than provide readers forms and instructions.  This is a different type of book.  It provides an outline of the process.  It is full of examples taken from my experiences as an bankruptcy attorney.  The examples provided are real situations, taken from the hundreds of bankruptcies with which I have been involved.  I have spent a substantial amount of time observing the bankruptcy process.  I have listened to the fears and concerns of my clients, and I have been there to help them through the issues that have arisen in process.  Some examples are based on my experiences as a bankruptcy attorney, and on my clients, others are based on events that I have witnessed while sitting in a bankruptcy courtroom, or in a United States Trustee’s office or hearing room.    

Bankruptcies can go horribly wrong.  When they do it is not a pleasant experience for the individuals involved.  Nearly every time that there is a problem in bankruptcy, it is the result of inadequate preparation.   It could be that the attorney involved did not ask the right questions; it could be that the debtor provided inaccurate or incomplete answers to the questions that were asked by the attorney; it also could be that the debtor or the debtor’s attorney failed to appreciate the consequences of the decisions they were making. But in each of these cases a little preparation and a better understanding of the law could have greatly reduced the cost to the debtor.  Ultimately, it is the debtor that bares the costs of errors. 

The good news is that all or at least most of the problems that could arise in bankruptcy are avoidable.  If the debtor and the debtor's attorney are prepared and well informed about the law and the about the debtor’s financial position, there is no reason for the process to be problematic. 

It is important to remember that this book is not a substitute for legal advice and is not intended to form an attorney client relationship between us.  This book is instead intended to help you begin the process of understanding bankruptcy.  By building this initial understanding, you will be better equipped to make the right choices concerning bankruptcy.  Reading this book should also point you in the right direction.  It should give you the insight necessary to hire high quality legal counsel. 

There are many good bankruptcy attorneys, but there are also many attorneys who file bankruptcies without the benefit of a good understanding of bankruptcy and how it works.  It is for this reason that you need to be informed.  You need to understand the critical issues involved so that when you interview an attorney, you can make sure that you get one prepared for the job of handling your bankruptcy. 

I congratulate you for making the decision to educate yourself about bankruptcy.  By taking this step, you have indicated a willingness to take this process seriously, and as a wise man once told me, “That’s better than not so much.”  

IRA Exemption Case

It is well known in Bankruptcy circles that in general IRAs are exempt from the Bankruptcy Estate.  It is less known but still significant that there are exceptions to this general rule.  Recently the sixth circuit decided a case that marginally scales back the reach of these exception.  This is very good news for debtors in Bankruptcy.

You can read the decision here

In this case, James Daley had a medium sized IRA with Merrill Lynch.  When he opened it he signed an agreement that pledged the funds against possible future indebtedness.  The BK court and the District Court said that this transaction exposed the IRA to the reach of the BK trustee.  Fortunately the Circuit reversed.


Check out my book on Amazon or one of the many links on this site.

Rebuilding your Credit After Bankruptcy

I came across this Blog posting recently and I think many of our readers would be interested in it so here it is.  

How to Rebuild Your Credit After Bankruptcy from Money Talks 

Hope you find it helpful

"Defalcation" in Bankruptcy

According to a recent Supreme Court decision the term "defalcation" in the Bankruptcy Code includes a culpable state of mind requirement involving knowledge of, or gross recklessness in respect to, improper fiduciary behavior.

Read the complete decision here 

Spousal Privilege

I came across a good article about the interactions between spousal privilege and the attorney client privilege.  This issue doesn't come up all that often in a Bankruptcy context but understanding the limitations of these privileges can still be quite useful to the readers of this site.  This understanding can help to ensure that confidential communications between spouses and between attorney and their clients remain privileged.

Jason Miller the author of the article is an up and coming legal superstar.  If you are considering law school it might be worth a look at his book on that topic as well.  

                                                                    

Either way check out the short article on privilege.  

Do I have enough or too much debt for Bankruptcy?

The short answer is if you have debt you have enough and you don't have too much.  In an overwhelming percentage of cases individuals can qualify for some form of bankruptcy.  

I have noticed that a significant percentage of my page traffic results from people attempting to find the answer to some variant of this question. “How much debt do I need to have to file Bankruptcy?” Sometimes it is phrased differently.  They may ask "Is $10,000 in debt enough to file bankruptcy?"  Or they may even ask if $100,000 dollars is too much to file bankruptcy.  It could literally be all sorts of variants on this theme.  In the end though it all amounts to “Should I file?”  or given my situation is bankruptcy a good idea for me?

This is the fundamental question that my book “Should I File: A Definitive Guide to Bankruptcy” attempts to answer and for that reason I think these people would be well advised to take a look at it.  It can be bought by clicking various links on this site or just by going to Amazon and typing it in.

For those of you who aren't sure if you want to buy the book I did address this issue briefly in a previous post entitled “Ok, But do I Qualify? This post answers the basic question of whether or not you qualify. 

Additionally you might want to consider whether or not Bankruptcy is right for you and your circumstances. 

A consult with a qualified bankruptcy attorney should help you to resolve this issue but keep in mind they make money by filing bankruptcies and therefore some of them may be more interested in talking you into filing than actually steering you in the right direction.  I have known many good bankruptcy attorneys but I have also known some that were less than scrupulous.  Be careful when selecting one.  The best thing you can do is educate yourself in advance.  Keep reading this site, consider buying the book which at fifteen dollars is a lot cheaper than being talked into a bankruptcy you don’t need.  

The book will help you avoid making a rash decision and will also help you select a good attorney if you determine that bankruptcy is the right choice for you. 

Bankruptcy can help but it can also be painful particularly if it is not handled competently so make sure its the right choice for you and that you have quality legal assistance before jumping right in.  

Rebuilding Credit after Bankruptcy

The good news is that your credit will take care of itself.  If you pay your bills on time and don’t over load yourself with new debts, your credit will heal itself.  The amount of time it takes to repair your credit is dependent on you.  It takes 10 years for the Chapter 7 bankruptcy to clear off your credit report for good.  So the worse case you wait 10 years, but the good news is that you can repair credit much faster by taking a few simple steps. 

• Pay whatever bills you have on time all the time.  You no longer have any margin for error.  I don’t think that this should be too difficult since you no longer are overwhelmed by debt. 

• Get a small credit card or a store card.  Use it a little but make sure you pay it off every month

            Perhaps buy a single tank of gas a month on it.  Whatever you do make sure you put the cash away to pay it off you can’t afford to fall back into the same situation.  This will take discipline but it is worth the effort. 

            Establishing good credit takes work but it is fundamentally about having a low debt burden relative to your income and paying your bills on time.  Once the bankruptcy is complete you should have already reduced your debt burden.  All that is left is to pay your bills on time.

            You are better off not having credit than abusing credit.  It’s up to you, but if you aren’t sure that you can handle a credit card then don’t get one.  Don’t go finance a car at 18 percent interest.  Make smart decisions and you will be able to buy a car for cash or at the very least get a reasonable interest rate.  If you are considering a big purchase, put the projected payment amount away for a couple of months before hand.  This will do two very important things for you.  One it will show you if you can afford the payment.  If you are having trouble saving the amount of the payment then it is probably too high.   You should also save and put away the amount of an increase in costs associated with the purchase (extra insurance, fuel, etc.)  The second reason to do this is it creates a buffer for you if something changes.  If you keep two months expenses on this purchase in a separate account the money will be there if an emergency occurs. 

            Finally before you buy anything or get any credit, do yourself a favor.  Make sure you understand how much you make and where it goes.  Write a budget, they may not be fun but a good budget is almost guaranteed to improve your credit and your life over the long run.  You will be able to see what you can and cannot afford.  You will be able accurately understand your true financial picture.  This kind of understanding is essential to avoid the mistakes that got you to where you were. 

            You’re done now, you can’t change the past but you can make sure it doesn’t happen again.  I wish you the best of luck and know that you can get through this process.  I have helped hundreds through it and my colleagues have helped millions.  There is no reason that a bankruptcy should ruin your life.  

What is a Discharge in Bankruptcy?

The United States Courts website provides the following description of a discharge. 

“A bankruptcy discharge releases the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.”

             While this description is accurate it can be a bit confusing.  The critical component of the discharge is the release from continuing liability.  This release effectively means that you no longer have a legal requirement to pay the discharged debt. 

            One thing to keep in mind is that a discharge does not eliminate the underlying debt.  It eliminates the filer or debtor’s requirement to pay the debt.  This distinction can be quite critical when considering the effects of security interests (mortgages etc).  

           Barring litigation, or another valid denial of discharge the debtor in Bankruptcy receives the discharge automatically just before termination of the case.  The discharge is ordered by the court in written form and is distributed to the debtor’s creditors and to the debtors themselves.  This order also terminates the automatic stay, of course at this point the auto stay is no longer necessary as it is effectively replaced by the discharge.  Like the automatic stay the discharge prevents creditors from collecting on the debts subject to the order. 

            It should be noted however, that there are certain types of debts that are not dischargeable or that are only discharged in certain circumstances.   The bankruptcy code specifically limits the types of debts that are discharged.  Many of these limits are the result of policy concerns on the part of congress.  This can be most clearly seen in the provision preventing the discharge of debts for personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated. 

            Other common types of nondischargeable debts include certain taxes, unscheduled or unlisted debts, spousal and child support debts, debts that resulted from willful or malicious injury to another person (i.e. if you hit someone in the head with a bat and they sue you Bankruptcy will not solve it for you), certain debts to governmental units, loans against tax-advantaged retirement plans, (i.e. 401K or pension loans).  In many of these cases the creditor is required to petition the court to except the debt from the discharge if the creditor fails to do so then the underlying debt is discharged regardless of its base dischargeablity. 

            Then there are other debts that are technically dischargeable but only in limited circumstances.  The most notable of these is student loan debt.  Student loans are very difficult to discharge and it is important that if you are considering filing to rid yourself of the burdens of student loans that you carefully consider all relevant case law and the code itself to determine if you will be able to discharge them. 

For more information on this topic check out the book section entitled "What is a discharge and How does it work?"  Which you can buy on Amazon or by clicking the various links found on this page.  

                                                                  

Ok, But Do I Qualify?

            Lots of people have asked me some varient of this question.  What usually happens is I tell them about the advantages of Bankruptcy and they are interested but they honestly do not believe that they can file.  The good news is that if you are reading this you probably can file some form of Bankruptcy.  Below I reproduce a short section of my book that bares the same title as this posting.  



  

                                                                   

            I am tempted to simply say yes, you do.  The reason I say this is because if you are reading this book chances are you qualify.  In fact, if you can read, there is a pretty good chance you qualify.  Technically all you need to qualify is to be a permanent legal resident of the United States or a citizen of the United States.  One would guess that the courts would probably not allow a person with no creditors to file successfully for bankruptcy but I doubt many debt free people are entertaining such a thing.  So I would say yes you do qualify.

            In general a person will qualify for some form of Bankruptcy however in the case of repeat filers there may be limits on their ability to get a discharge and in the case of high income earners there may be limits on the availability of a Chapter 7.  So perhaps a better question would be do I qualify for a Chapter 7 Bankruptcy?  That question will be answered more fully in the section entitled “Types of Bankruptcy/Choosing the Right One for You.”  

            Earlier in this book, I gave a brief description of the difference between a Chapter 7 and 13 Bankruptcy.  A review of that difference leads most people to believe that a Chapter 7 is a much better deal, and frankly all things being equal it often is a much better deal.  However there are cases where a person does not qualify for a discharge in a Chapter 7, and in those cases it is often a good idea to look at a Chapter 13.  As with the underlying “do I qualify” question, this issue will be dealt with much more fully in the section on choosing the right type of Bankruptcy. 

Automatic Adjustments and Amended Dollar Amounts

Automatic adjustments to certain dollar amounts stated in various provisions of the Bankruptcy Code, one provision in Title 28, seven Official Bankruptcy Forms which contain adjusted dollar amounts, and two Director's Forms which include dollar amounts take effect today.

These adjustments will apply to cases filed on or after April 1, 2013.

For more information on these check out the United States Courts site

Also don't forget to check out the book below.  

                                                                     

Bankruptcy Terms

We recently noticed this glossary which may be of some assistance to individuals considering bankruptcy.  Take a look and let us know what you think.

US Courts Glossary of Bankruptcy Terms

for more information check out the book by clicking below.

                                                         

History of Bankruptcy (Part Two)

This is part two of two on the history of bankruptcy.  This post covers the Bankruptcy Law of the United States.  The previous post on this topic covered the ancient history of bankruptcy and its origins.  Like the last post on this topic this post is an excerpt from my book "Should I File: A Definitive Guide to Bankruptcy," which can be bought by clicking the link below. 

The first act of Congress was the Bankruptcy Act of 1800, and while that act was repealed and amend multiple times before the current law was enacted in 1938 the basic concept remains very much the same.  There been several changes to the Bankruptcy laws since 1938 but in general the law remains the same.

Many readers will recall the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  When the bill passed in to law the news media, fueled by bankruptcy attorneys looking for a quick buck made it sound as if once the law took effect in October of 2005 it would become nearly impossible to file a bankruptcy and that if you were successful in qualifying you would still spend many years in debt and in many cases would lose all of your personal property.   After the law passed and was signed into law in April of 2005 by then President George W. Bush, these claims were repeated so often that many of them persist today.

Most aspects of the new law did not take effect until October and the period of time between April and October of 2005 became a virtual gold rush for bankruptcy attorneys many of whom filed more than ten times their usual number of bankruptcy.  One such attorney I talked to told me that he filed over 400 bankruptcies in the 5 days before the law took effect.  This mad rush of filings was most likely due to the misconception that after October of 2005 Bankruptcy as we know it would no longer exist.  Ironically many of the attorneys practicing in this area fell for their own hype.  I know of several former bankruptcy attorneys so scared of the new law that they stopped filing them all together.

In retrospect, the changes in the Bankruptcy law did little to prevent the protection of the code.  The most significant change from the average debtors perspective is the creation of an income based test, known as the means test.  The means test prevents certain high income debtors from discharging (eliminating) all of their debt.  In the case of high income debtors or debtors who make more than the means test allowable amounts (which varies by state) there is a requirement that make their best efforts to pay back some portion of their debts.  The amount that they pay back is determined by among other things their ability to pay after allowances for reasonable living expenses.  This type of repayment bankruptcy is known as a Chapter 13 Bankruptcy.  

                                                                  

History of Bankruptcy (Part One)

This post is part one of two and covers primarily the ancient history of Bankruptcy.  This is an excerpt from my Book "Should I File: A Definitive Guide to Bankruptcy" If you find the information on this site useful please consider purchasing my book which covers the material on this site in more detail.  It is full of examples and case studies which will aid you in developing a more complete understanding of the issues involved in Bankruptcy. 

A long long time ago:

Before the modern era there was no official bankruptcy law.  In many cases, failure to pay your debts resulted in debtor’s prison, slavery or even death.   Even after the idea of bankruptcy came about the consequence of bankruptcy was often imprisonment or death.  Genghis Kahn for example is said to have included a provision in his Bankruptcy law that mandated the death penalty to anyone who became bankrupt three times.  And while it may seem that the modern consequences of Bankruptcy are bad you can be assured that they will not include death.  

Many of the world’s major religions have mechanisms built in to alleviate or even eliminate debt.  These mechanisms are found in the Bible, the Torah, and the Qur’an.  The Torah and the Old Testament included a year of Jubilee when most or all debts were forgiven.  This concept forms the basis of modern day chapter 7 bankruptcy where the debtor’s debts are forgiven often completely. 

The second chapter of the Qur’an (Sura Al-Baqara) Verse 280 states that “…if someone is in hardship, then let there be postponement until a time of ease.”  This statement resembles modern day chapter 13 bankruptcy where debtors propose a plan to repay their debts on a schedule that it more affordable than the current schedule. 

 Modern bankruptcy first leapt on to the scene in Britain with the Bankruptcy act of 1542 (34 and 35, Henry VIII, c.4).  In the United States of the first acts of the Federal Government was to create bankruptcy protection.  In fact, the power to regulate Bankruptcy in the United States was granted by the Constitution when it was ratified in 1789.  In Article I, Section 8, Clause 4, Congress was granted the power to legislate “uniform laws on the subject of Bankruptcies” throughout the several States.  

                                                                

Not just your credit score

           This post is a bit longer than my typical post but I think that you will find it helpful.  This post describes in some detail the inner workings of the credit decision made by lenders.  So if you are trying to borrow money for any reason or you think that you might consider buying something on credit in the future then you may find this post helpful.  As always keep in mind that every situation is different and I can not offer legal advice over this blog.  Make sure you seek out the information you need before making an major financial decision. 

 There are three categories of information that are relevant to an individuals credit worthiness.  The first category deals primarily with the repayment of past debts.  This is reflected in your credit score.  The second category deals with your income and the third with you current liabilities.  (ie how much money you owe). 

            It’s the balance between these three things that make up the true picture of your individual creditworthiness.  When a lender evaluates a person’s credit they do look at the score, but they also look at the debt to income ratio. 

Debt to Income Ratio = Total Debt/ Total Income

            The lower the product of this formula, the better your overall financial position is.  For example if you owe $1000 and make $100,000 dollars a year then your debt to income ratio would be calculated in the following manner. 

Example #1: Debt to Income Ratio = $1000/$100000 = .01

          This means that for this individual their total debt is 1/100^th of their gross annual income or more clearly stated their gross annual income is 100 times their total debt load.  A very manageable number regardless of how much debt or income a person has.  It wouldn’t matter if the person had one million dollars in debt if their ratio was still .01 then they could easily afford to pay their debt.  Of course to keep that ratio they would have to be making one hundred million dollars a year. 

Example #2: Debt to Income Ratio = $50,000/$100000 = .5

            In Example # 2 the person’s income remained $100,000 a very respectable income, but their total debt increased to $50,000, which caused their debt to income ratio to rise to .5.  Even at this level, they probably can afford to pay their debts but as you can see the higher the ratio the more difficult it becomes to pay one debts. 

            Now that we have seen how this ratio is calculated and understand why it’s important we can see why it is that lenders want the information that they require.  Interestingly, while filing Bankruptcy hurts your credit score (which is calculated primarily on past repayment of debt), it significantly improves your debt to income ratio, arguably making you a much better credit risk after Bankruptcy. 

Let’s take a look at a more typical example, where the individual considering Bankruptcy has a car that they owe $15,000 on and $50,000 dollars in credit card debt.  In this scenario let’s assume an income of $40,000 per year

EXAMPLE # 3: Debt to Income Ratio = $65,000/$40000 = 1.63

            As you can see, this person is probably struggling to make their payments with a ratio significantly above one.  Let’s assume that they chose to keep their car when they file Bankruptcy.  Which means that post Bankruptcy, this individual will owe $15,000 on their car and will have no credit card debt.  The Bankruptcy should not affect their income. 

EXAMPLE #3 After BK: Debt to Income Ratio = $15,000/$40000 = .38

          As you should be able to see the Bankruptcy process greatly improves their debt to income ratio making them a much better credit risk.  Many banks and lenders who understand this trend are quite willing to extend credit to individuals shortly after they file Bankruptcy. 

            When excluding your home it is a very good idea to keep your debt to income ratio as low as possible.  For a variety of reasons the numbers are a little different when a home mortgage is involved, which is why I recommend calculating your debt to income ratio both with and without your mortgage included.

            Example #4 illustrates the impact of a home mortgage on this calculation.  In this scenario, the individual has a home mortgage of $150,000, credit card debt of $15,000 and income of $50,000 a year. 

I go in to these issues in much more detail in my book which you can buy on amazon by clicking the link to it below.

                                                               

Defining Chapter 7 and Chapter 13

While there are many different types of Bankruptcies.  On this site you will most often see references to Chapter 7's and Chapter 13's. 

Chapter 7 Bankruptcy is by far the most common form of individual filing some people refer to it as Liquidation or total Bankruptcy in this site it will be most often referred to as a Chapter 7.   You also see references to Chapter 13 Bankruptcies which are also called repayment or restructuring Bankruptcies. 

These names we use derive from the section of the United States Federal Code specifically 11 USC Chapter 7 and 11 USC Chapter 13.   There are other chapters of bankruptcy but they generally involve complex business restructuring or specific entities like the Chapter 9 which is for cities and states or the Chapter 12 which is for certain farm restructuring programs. 

In simple terms all you really need to know is that a Chapter 7 allows the debtor to eliminate most debts and keep most of their stuff without making any kind of payments to the Trustee.  And that in a Chapter 13 the debtor enters into a plan to repay some part of their debts and after a period of time typically between 36 and 60 months any remaining debt that they have can be discharged. 

Understanding the differences between these chapters is fundamental.  I highly recommend learning as much as you can about these difference before entering into any type of Bankruptcy.   

Simple definitions

Chapter 7:  Most common type of Bankruptcy available for business and for individuals.  In most cases individuals who file this chapter can keep all of their assets and are not required to pay any of their debts, it is for this reason it is sometimes also referred to as “Total Bankruptcy”

Chapter 13: Is a type of Bankruptcy only available to real people (businesses cannot file this type) It is a repayment plan Bankruptcy that last between 3 years and 5 years, with the debtor typically paying monthly or weekly payments.  At the conclusion of the 3-5 year period any remaining debt can be discharged. 

These definitions and many others appear in the glossary at the back of my book, "Should I File: A Definitive Guide to Bankruptcy.  As you read this site it may be helpful to refer to the book's glossary which can help to ensure that you understand the vocabulary used on this site.  This understanding is critical to understanding the Bankruptcy process.  If you have not yet purchased my book it can be bought on Amazon by clicking the link below.