Bankruptcy Is As American As the President
Rapper 50 Cent, singer Billy Joel. broadcaster Larry King, porn mogul Joe Francis, football quarterback Vince Young and President Donald Trump all have something in common.
The answer: They all have declared bankruptcy at some point in their lives, either personally or (in Trump’s case) for a professional entity under their control.
Bankruptcy is a legal tactic used by individuals and companies who cannot pay off their debt and seek modifications or discharging of those obligations.
Only a court can grant bankruptcy status, and it is an involved procedure, with several types of filings available. Obviously, a bankruptcy filing will affect your personal or business credit status, and may result in some possessions being confiscated or operations ceasing. But if you do declare, your financial burden will be eased, you may be able to stay in your home, keep your car, and run your business. You mostly will be able to avoid the dread that comes from a constantly ringing phone from collections agencies.
Bankruptcy remains on your credit report for seven to 10 years, depending on the state and the type of filing. During that time, you may still be offered minor lines of credit or secured credit cards and some minor forms of secured credit. But the filing may cause employment issues if you are job-hunting and they check your credit. Given the severe consequences, advisors generally say that you should only consider bankruptcy if you have more than $15,000 in debts.
Not all debts can be discharged by a bankruptcy filing. Alimony, child support, any debts that happen after a filing, debts that come within six months of the filing, and loans fraudulently obtained are exempt from protections. Student loans and most taxes are not wiped out, and any co-signer may be on the hook for any outstanding debts if they don’t also file.
EVERYONE DOES IT
It doesn’t matter if you’re one of the top earners in your field or have a $26 million contract. If you spend more than you earn, pile up debt, or have a venture that doesn’t generate enough cash to cover its expenses, you may find yourself so far underwater that you need to turn to the bankruptcy courts for relief.
Each year, thousands of Americans and businesses file for bankruptcy in districts, states and federal courts. More than 800,000 filings were noted in the fiscal year 2015-2016, down from 2011’s 1.137 million and a steep drop from the all-time high of more than 2 million filings in 2005.
Still, whatever the number, the total still represents a lot of hopes and dreams dashed on the financial rocks.
Not every person who declares bankruptcy is a foolish spender. In business, it’s a common tactic to reorganize debt, particularly on investments that didn’t meet initial projections or declined in value. Or you may have been the subject of a civil suit, and declaring bankruptcy is used to shield assets from the clutches of the other side. You may have been blindsided by a spouse’s unexpected bills, or discovered that gambling or bad accounting was going on away from your view.
Of course, there’s also the spendthrifts whose plans go askew. When quarterback Vince Young declared bankruptcy, stories emerged that he was spending $5,000 per week at the Cheesecake Factory, and once bought out most of the seats on a Southwest Airlines flight from Nashville to Houston so he could relax in peace.
But for most, bankruptcy is a slow leak into serious debt, and the situation can become critical by the loss of a job, unexpected illness or some other calamity that puts your ability to pay in jeopardy.
THE RAW DATA
December is a prime month for bankruptcy declarations. The vast majority of them are consumer filings, with businesses account for just three percent of the total. State filings vary widely, and the raw numbers skew toward the most populated states, with California leading the bankruptcy parade with more than twice as many filings as runner-up Florida.
Age is becoming more of a factor in who files. Researchers at web site debt.org have determined that the profile of the average bankruptcy petitioner is older, married, high school educated and making less than $30,000 per year. The median age is from 38 to 45 years old for filers, while those younger than age 25 are less than five percent of the overall totals. Married people are more than 64 percent of filers, while 17 percent of debtors are single, 15 percent divorced, and three percent are widowed. Equal numbers of men and women file.
Filing for bankruptcy also isn’t necessarily the end of financial problems. About eight percent of filers file a second bankruptcy at some point, accounting for 16 percent of all cases.
CHOOSE YOUR TYPE
When you file for bankruptcy, you will talk to an attorney and receive some form of credit counseling. During these consultations, you will determine which form of bankruptcy is best suited for your situation.
Chapter 7 bankruptcy is the most common form, accounting for about 70 percent of non-business filings. Under Chapter 7, debts are discharged and you are no longer obligated to pay them. However, the court may order a trustee to sell some of your assets, with the proceeds going toward court costs, with any remainder going to creditors. Laws vary from state to state as to what you can retain – for example, under federal law, a single person can retain $16,500 equity in your home and $2,575 equity in a car. You can also keep job-related tools and some household items. These amounts double if you are married. Social security, pensions, unemployment, veterans benefits and welfare payments are generally unaffected.
The second most-common form of filing is Chapter 13 bankruptcy. This involves repaying some debts to have the rest forgiven. If you don’t want to surrender property or have too high an income for Chapter 7, this may be your route. You can only file for Chapter 13 if your debts do not exceed a certain threshold, which varies depending on your location. You also must set up a three to five-year plan to repay creditors. If you do not complete that plan, you may be forced to file Chapter 7.
There are four other types of bankruptcy, but most are used by municipalities, farmers and businesses.
If the burden of your debts appears insurmountable, talk to an attorney. There are alternatives to bankruptcy, including debt consolidation loans, debt settlement plans, debt management plans. However, be warned that you should not pay any up-front fees for these plans. Many unwary consumers fall victim to firms that take upfront money and never fix the problem. That’s one additional debt you want to avoid.
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