What is bankruptcy?
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Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor (“involuntary bankruptcy”) in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a “voluntary bankruptcy” that is filed by the insolvent individual or organization).
Generally, a debtor declares bankruptcy to obtain relief from debt, and this is accomplished either through a discharge of the debt or through a restructuring of the debt. Generally, when a debtor files a voluntary petition, his or her bankruptcy case commences. The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. The 2005 amendments to the US Bankruptcy Code introduced the “means test” for eligibility for chapter 7. An individual who fails the means test will have his or her Chapter 7 case dismissed or may have to convert his or her case to a case under Chapter 13.
Why should I file for bankruptcy?
There are a number of reasons to file for bankruptcy. Different individuals have different combinations of reasons to file but many people have many of the same reasons. Here I pu together a number of the main reasons to file for bankruptcy and you probably have at least one of these and maybe many more…
1) You get a fresh start. Filing for bankruptcy is powerful and useful tool which allows you to discharge most of your debts and usually keep most of your assets. You get a “fresh start” with your life and you can begin again financially without the burden of debts you cannot pay. You can also avoid the permanent debt trap from which it is very hard to escape. Remember that bankruptcy is nothing new. It is as old as the Old Testament of the Bible. It has been around in some form for thousands of years. The tradition in Old Testament times was to forgive debt regularly every 7 years. This practice had a tremendously beneficial effect on society and its people as it can on you. Even back in ancient times people knew that everyone in society is better off if individuals don’t carry around debt long-term. They knew then that debtors were happier, healthier, and better and more productive citizens when their debt was forgiven. How badly is the burden of all this debt affecting your everyday life now? Do you feel the fear, the worry, the anguish we all feel when we are over our head in debt and we don’t know how to get out or what to do. Bankruptcy is a legal, definitive action you can take that can make the debt all go away and put your life back together to give you a fresh start.
2) Usually your credit score will improve over and above what your credit score would be if you didn’t discharge these debts. By the time most people file bankruptcy they are so far behind in their credit card payments that bankruptcy will actually help improve their credit score. Each month that you don’t pay those monthly credit card bills your credit score remains low. Since most people are unlikely to pay their debts off this results in a permanently low credit score. If you are in the same position then bankruptcy will certainly help you. Your credit score will decrease immediately upon the filing of the case but when your bankruptcy is finished your debts will appear as “discharged in bankruptcy”. Those debts discharged in bankruptcy will then no longer negatively impact your credit score. You can now begin to rebuild your credit score with new credit. You need to have credit in your name and use that credit wisely to increase your score. If you charge things on your new cards and then pay your payments on time and pay the full balance every month you will slowly and steadily build up your score. Every month that you pay those payments you should get points added to your score. These points will add up over time. You will get credit card solicitations after the bankruptcy discharge so use them wisely to increase your credit score. Any other payments you make on time for financed items will help drive up your credit score. Some of my clients reaffirm their cars in bankruptcy so they will get the benefit to their score when they make payments. Others will finance a new car after bankruptcy for the same purpose.
3) You get freedom – Shakespeare said “never a borrower or lender be” because as a borrower you become a slave to the lender. If you owe credit card debt then you are a slave to those big banks to whom you owe money. You pay huge amounts of interests to these big banks every month to service your debt. These interest payments only serve to enrich very large corporations at your expense. Filing bankruptcy can serve to free you permanently from both the worry and the financial strain of continual and unrelenting debt and the stress of the collection actions. Your discharge is your key that unlocks the debt prison doors.
4) You can keep most of your assets. Most people can retain most of their assets in a bankruptcy. That includes your house and your cars. Many people think they will lose everything. We have very generous exemptions in California that allow most people to keep everything they own. If your house and cars don’t have any equity then you can certainly keep them. If they do have equity then usually we can find a way to exempt them. Your house is probably secured. If there is equity in the home then there is a homestead exemption we can use to allow you to keep it. Your car may be secured and if there is equity in that we can use the car exemption and the “wildcard exemption” together to keep your car (if we don’t have to use the homestead exemption on your house”). Cars usually have no equity if financed and these days with housing prices low, many houses also have no equity. Your personal furniture and clothes you can keep under a separate exemption and jewelry and “tools of the trade” also have their own exemptions. Even your retirement fund, if it’s an IRA or 401k, is protected by federal bankruptcy law up to $1,000,000.
5) You will get peace back in your life. When you file bankruptcy your creditors must stop calling you on the phone. Most of my clients have not answered their phone for some time before they actually consider bankruptcy. Filing a bankruptcy case will stop all of these collection efforts with the miracle of the “stay” that is created once you file bankruptcy. This stay stops all creditors from contacting you in any way once they get notice from the Bankruptcy Court of the filing. So remember that as far as you debts go, peace and tranquility are waiting to return to you if you file bankruptcy.
6) No one needs to know. Many people are afraid of bankruptcy because they think that their landlord or their employer will find out about their bankruptcy and they believe they can be evicted or lose their job. This is not true and you will still have anonymity if you file. You don’t have to tell anyone that you filed bankruptcy and probably no one will know unless they do a public record search. It is unlikely that this will happen though so your secret should remain safe. Your landlord will probably not be notified especially if you are on a month to month lease. Your employer need not know unless you already have a wage garnishment that needs to be stopped. You cannot be fired from your job or thrown out of your apartment or home because you filed bankruptcy if your employer or lenders or landlord do find out. Discrimination of this sort based upon a bankruptcy filing is illegal.
7) You have other things to do with your money – If you are like most people then you need the money you earn from working to pay for your own personal bills and pay for your family and their needs. You don’t need to give this money to these large banks. You don’t need to spend this money to enrich large banks for money you borrowed from them a long time ago. If you earn less than is allowed in the means test then you can probably file bankruptcy and discharge your debts. You can then use your money for other purposes than paying off old dischargeable debt.
8) You have already paid the credit card companies back – If you are like most of my clients then the debts that you owe are probably very old. You have probably been making payments on these debts for years. If that is true then you have already reimbursed the creditors for them. By the time most people file a bankruptcy they have already paid back all of the money they borrowed plus some interest. This is because of the very high interest rates that credit card companies charge. Remember that the banks borrow money at a very low-interest and then lend it to you at very high interest. They keep the rest. It is a most profitable business and the make lots of money doing it. The banks want to keep you paying them this exorbitant interest indefinitely. Some of you are paying as much as 30% interest on the money you borrowed. Don’t make the mistake of feeling that you need to keep paying these companies. You have already paid them enough so file a bankruptcy, discharge the debts and move on.
9) Times are very tough and many people need to file more now than ever. There is a recession on now and you need relief from your debt maybe more now than ever before. Many people are unemployed and those who are employed don’t know if they may lose their job in the near future. Even if your job is secure and you expect no pay cut, you still probably need your funds for your ongoing bills. Why pay for old debts incurred long ago when the money you borrowed back then often went to pay for other bills? Times are very tough in this recession so explore the possibilities that bankruptcy opens up today.
10) Personal bankruptcy is your bailout – Corporations file bankruptcies all the time including the credit card companies that you owe money to. They bail out with bankruptcy so why not you? In addition many banks have received government bailout money to keep them going. They then turn around and bug you for money. That is your money they are receiving from the government but they are not giving you any breaks. So if big companies can file bankruptcy and get your money sent to them so they can collect more money from you then why don’t you get your bailout? File bankruptcy.
11) The creditors absolutely will not stop trying to collect from you until you pay or you are dead or you file bankruptcy. They only know one thing and that is to collect your debt with all of the interest and penalties that they can add. They will continue to sell the debt to other collectors and these collection agents have a nationwide network. They buy, sell, and trade these debts but they keep trying to collect. They are like the Terminator in that movie. They are like a machine which won’t stop until you are dead. If you file bankruptcy then they must stop trying to collect the debt. They will then discard your debt because if they try to collect it after the bankruptcy discharge then they would be in violation of federal bankruptcy laws.
12) Your situation will probably continue to get worse and worse if you don’t file bankruptcy or pay these creditors. The collection efforts will increase in intensity and eventually the creditors will file suit. Many people try to put their heads in the sand and hope the debts will disappear. This is not the case though as the situation will only get worse. The debts will grow in size as interest and fees grow. Eventually some creditors will file suit and serve these on you. If you do not file at this point then you could get a default judgment against you and they will use this judgment to collect money from you. They can now lien your house and file a lien against you personally. Some liens cannot be removed in a chapter 7. In addition creditors with court judgments can garnish your wages so your income could decline. They can also get access to your bank accounts and remove money from them legally to satisfy your debt. You may need that money to pay a bill but it could be gone one day. They can even call you into court for a debtor’s exam to get you to answer questions about your job, your bank account, and your general financial situation and they can get you in there every 6 months. Not all of these things will happen to all people but these are the tactics creditors can use against you when they have a court judgment. As you see here your financial situation will continue to get worse over time when you have debts. It will not get better on its own and the debts won’t go away. Therefore don’t delay and preserve your rights by exploring your options with bankruptcy. Thank you for reading my “12 Reasons to file bankruptcy article” and if I can be of any further help please call for a free consultation. Douglas G. Farquhar, Esq. 1901 First Ave. Suite 217H San Diego, CA. 92101 (619) 702-5015 E-mail: click here