A BANKRUPT AMERICA

By: Leland C. Abraham, Esq.

While many politicians and talk show hosts debate whether America is in a “recession,” one thing is for certain, more people are filing for bankruptcy now than ever. The growing hysteria generated from the subprime mortgage crisis where companies like Bear Stearns, IndyMac, Freddie Mac and Fannie Mae are being bailed out or regulated by the federal government is of daily discussion by news media.

Growing unemployment and increased gas prices have taken a toll on individuals and corporations as well. However, individuals and corporations do have legal options to deal with their worsening financial situation related to their inability to pay their mortgage payment or looming credit card debt. Bankruptcy is a method that allows individuals or corporations to satisfy debts when they do not have the financial resources to cure claims with creditors. This article is intended to give you an overview of Bankruptcy as well as the pros and cons of it if you choose to pursue this legal option.

Bankruptcy is a legal process through which people and businesses can obtain a fresh financial start when they are in such financial difficulty that they can not repay their debts as agreed. Bankruptcy is created by federal statute; hence, jurisdiction for bankruptcy is under the federal courts.

There are four (4) different forms of bankruptcy applicable to consumers or individuals. Chapter 11 bankruptcy is a form of bankruptcy given to corporate entities for restructuring their business. When businesses become insolvent, corporations will file Chapter 11 bankruptcy to satisfy debts with creditors while still continuing to exist as a corporate entity after the filing of bankruptcy. For example, Michael Vick and his associated legitimate business ventures filed for Chapter 11 bankruptcy protection recently.

Chapter 12 bankruptcy is used for agricultural purposes. This form of bankruptcy is used for farmers and fishermen. If there is a supply quota that the farmer or fisherman must meet and circumstances arise where he or she is not able to meet the quota for a specified amount of periods, he or she may file for Chapter 12 bankruptcy protection to satisfy those creditors whom they are not able to provide supply for.

Chapter 13 bankruptcy allows individual consumers to make monthly payments to save possession and ownership of real or personal property. Like Chapter 11 bankruptcy, Chapter 13 bankruptcy is a form of debt reorganization. People file for Chapter 13 bankruptcy when they either have a single asset with a lot of equity or a number of small assets that yield a high net value. Usually, individuals will file for Chapter 13 bankruptcy if they would like to save their home from foreclosure. The person would use Chapter 13 bankruptcy to reorganize their debts and the person would make a monthly payment plan to pay off the debt of the bankruptcy estate in three (3) to five (5) years. For example, if an individual had $50,000 worth of debt and an average interest rate of 50%, the bankruptcy would reorganize that person’s debt to where the person may owe $44,000 and have an interest rate of 40%. That person would be expected to pay off the new balance of the debt through a monthly plan payment for either a three (3) or five (5) year period.

Chapter 7 bankruptcy is the most common bankruptcy for individuals or corporations. This form of bankruptcy is for individuals or corporations who have accumulated so much debt that debt counseling or debt management is really not an option for them. The Chapter 7 bankruptcy serves as a debt liquidation in which all of the applicant’s debts are discharged and the applicant is given a “fresh start.” If a corporation files for Chapter 7 bankruptcy, they will no longer exist as an entity.

There are several qualifications for the Chapter 7 bankruptcy. One such qualification is the median income qualifications. All individuals who wish to file for Chapter 7 bankruptcy have to fall within an income range. This income range will vary by state, but it usually is around $37,000 for a household of one. There are incremental increases to this income qualification the more people are in the household.

Another qualification to the Chapter 7 bankruptcy is the residency requirement. Generally, an applicant for Chapter 7 bankruptcy must live in the state in which he or she files for at least six (6) months. Although this is the residency requirement to file for Chapter 7 bankruptcy, there is a separate residency requirement in order to qualify for the state’s exemption laws. An exemption allows a debtor to protect an asset from being included in the bankruptcy estate to be distributed by the Chapter 7 trustee to creditors.

Advantages and Disadvantages

There are advantages to filing for bankruptcy. First, debtors can obtain a financial fresh start after they receive a discharge. For example, a debtor who files a Chapter 7 bankruptcy will be able to be discharged from paying most credit card debts. Second, creditor’s collection efforts will stop as soon as an individual or corporate debtor files for bankruptcy protection under a Chapter 7 or Chapter 13. This is known as the automatic stay. If a creditor continues to try to collect on a debt after receiving notice of a bankruptcy filing by a debtor, the creditor may be cited for contempt of court and/or ordered to pay damages. Also, you cannot be fired from your job solely because you filed for bankruptcy. Furthermore, you can freeze your FICO credit score by filing for bankruptcy.

However, there are disadvantages to filing for bankruptcy. Bankruptcy filing will remain on your credit record for up to ten (10) years. This record may affect future finance opportunities. So, it would behoove any potential applicant to not obtain any new credit cards or high interest loans after filing for bankruptcy for some time. But, research has given mixed results to the time when people or corporations can obtain new finance opportunities even after filing for bankruptcy.

Alternatives to Bankruptcy Filing

Another option that an individual or corporation might pursue is to directly contact the creditor and see if they are wiling to allow a lower monthly payment or extend the time to remit payment to lower the payments. Also, you can consolidate your debts by taking out a big loan to pay off all smaller amounts of debts that you owe.

If interested in filing for bankruptcy, please consult your local bankruptcy attorney in your area. We have provided a link to the National Association of Consumer Bankruptcy Attorneys for you to consult on this webpage as well.

Legal Disclaimer: This site provides information about the law designed to keep readers informed of pertinent legal matters affecting the African-American community. But legal information is not the same as legal advice -- the application of law to an individual's specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer in your specific location if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.