Bankruptcy - Your Fresh Start
By Christopher Cooper
Most American consumers are living too close to the edge. They are carrying too much credit card and mortgage
debt and have too little in the way of savings. When the inevitable unexpected crisis comes along, they have
little left to handle it and quickly slip into a critical financial state.
According to many bankruptcy experts, most people file for bankruptcy due to life-changing experiences, such as
a job loss, divorce or serious illness. Uninsured medical expenses are supposedly the cause of about 20% of
bankruptcy filings. But excessive debt also plays a very large role.
If you are drowning in debt with little realistic hope of paying off your bills, bankruptcy is your only real
option. Although far from pleasant, bankruptcy can be easier to handle than the constant pressure put on a debtor
by lenders and collection agencies. You can immediately stop all harassment and legal actions, wipe out a good deal
of your debt and get a new start on life.
The anomalies of credit scoring also work against debtors struggling to pay off debt. Your score will be low
because of excessive use of debt and missed payments. You’re unlikely to get new credit and the interest rates on
your credit cards might be raised to usurious levels. You are likely to have a better credit score and find it
easier to get credit – very expensive credit - after bankruptcy than before.
Also the stigma and embarrassment that used to accompany bankruptcy has largely disappeared. To many, it has
become just another financial planning tool.
The Bankruptcy Procedure
Bankruptcy courts are part of the Federal court system. The bankruptcy law itself is a Federal law, although the
states can have their own laws, which govern such things as exemptions. Federal bankruptcy judges apply both the
Federal and state laws in the jurisdiction where they sit. Debtors sometimes have a choice of which law should
Bankruptcy proceedings are commenced by filing certain required forms and paying a fee. Filling automatically
stays all legal proceedings against you as well as all debt collection actions. Fees can be paid in installments,
but must be completely paid before the dischare will be granted.
A trustee will be appointed. His job is to review your financial affairs, collect and sell assets, if necessary,
and distribute the proceeds to your creditors. If you are setting up a repayment plan, he will be responsible for
seeing it implemented. He will even pursue your debtors to collect money owed you that can be used to pay off your
The trustee’s powers include the power to set aside preferential transfers made to creditors within 90 days
before the filing of the bankruptcy petition, the power to undo security interests and other transfers of property
that were not properly recorded under non-bankruptcy law at the time the petition was filed and the power to pursue
claims such as fraudulent conveyance and bulk transfer remedies available under state law.
He also holds meetings which are attended by the debtor filing for bankruptcy and his creditors. This is
probably the hardest part of the whole proceedure for most people.
The trustee will question the debtor about his financial affairs and go over his financial records to determine
that all assets have been disclosed and that no fraud is being perpetrated on the court.
Attorneys for the creditors are also allowed to ask questions about your expenses and assets.
The trustee will also instruct you on other alternatives and lecture you on the proper use of credit.
He will then issue a report the bankruptcy judge will use in deciding whether to dicharge your debts and which
debts are to be included.
A debtor is unlikely to ever meet the judge. In a Chapter 7 case, the debtor will not appear in court unless an
objection is made. In a Chapter 13 case, the debtor might have to appear at a hearing approving his repayment
Most of the work will be done in the trustee’s office.
What Debt Can Be Discharged?
Not all debt can be discharged by a bankruptcy court.
A bankrupcy court cannot discharge debts arising from alimony, child maintenance and support obligations;
certain taxes (including the last three years income taxes); debts for educational benefit overpayments or federal
student loans; debts for willful and malicious injury; debts for death or personal injury caused by the driving
while intoxicated from alcohol or other substances; and debts from criminal restitution orders.
To the extent that these types of debts are not fully paid by the sale of assets during during a Chapter Seven
case or not fully repaid during a Chapter Thirteen case, the debtor is still responsible for them after the
bankruptcy case has been concluded.
Other debts may or may not be discharged. Debts for money or property obtained by false pretenses, through
fraud, embezzlement or misuse of funds while acting as a fiduciary; debts for willful and malicious injury to
another entity or to the property of another entity; and debts arising from a property settlement agreement
incurred in connection wth a divorce or separation are discharged, unless a creditor convinces the court to have
such debts declared exempt from discharge.
If you can't get at least half of your debts discharged, it's not worth the effort.