Why People File for Bankruptcy

If you're struggling with debt, you may sometimes find yourself wondering if you should file for bankruptcy. If you're like most people who wonder about doing this, then you don't - but why? Well, one reason that many people don't file for bankruptcy is because they don't know if they are in a position to do so.

There are actually many different reasons that people file for bankruptcy, most of which involve common sense like the loss of ones job or overwhelming medical bills - and not laziness. Other reasons may surprise you, with one being that you may actually be able to improve your credit score by doing so! In any case, if you feel like one of the reasons below could apply to you, you may want to consider filing for bankruptcy yourself.

Reason #1: Loss of a job

One of the most common causes for why people choose to go bankrupt is because of a job loss. It is hard to find a job in today's market, and if you are already struggling with debt, the loss of your job can come as a major blow. Not only will you lose the money provided by the job, but other things as well. This includes things such as medical benefits, insurance, bonuses (such as access to a company vehicle), or discounts which also came with the job.

Reason #2: Preventing repossession of properties

If you file for a Chapter 13 bankruptcy, you might be able to force creditors to return property (such as your car) back to you. Your past missed payments will be consolidated into your bankruptcy plan, and you will give monthly payments to the trustee of your bankruptcy plan, and who will in turn pay the finance company on your behalf.

It is important to remember that repossession of properties is only possible under a Chapter 13 bankruptcy and NOT a Chapter 7 bankruptcy.

Reason #3: Improving your credit score

There are actually some cases where filing for bankruptcy can help you improve your credit score. To use an example, it is possible for someone with a credit score of 450 to raise their credit score as high as 700 if they meet certain requirements.

This is because when you file for bankruptcy your score is determined based on how you well you do compared to other bankruptcy filers. In other words, your score is matched against people in similar situations as you, not against people with perfect credit scores and zero debt.

As long as you manage your bankruptcy plan well and manage to meet its minimum payment obligations, then it is possible to raise your credit score. Keep in mind, though, that you cannot raise your score to an 850 (or close to it) so long as you are registered as being bankrupt.

Also, if you file for bankruptcy when you have a high credit score (which is not advisable, because doing so would indicate that you have other options available to you) then doing so may in fact harm your credit score. It is also advisable consider other means of raising your credit score before filing for bankruptcy.

Reason #4: Stop home foreclosure and catch up on missed mortgage payments

Filing for Chapter 13 Bankruptcy will stop foreclosure before bidding or sales will occur. This gives you time to repay mortgage arrears or your remaining mortgage balance. It does not eliminate your property mortgage.

Reason #5: Put a halt to creditor harassment

It doesn't sound like a major reason, but if you're struggling with debt and receiving rude and harassing calls on a daily basis, the pressure can sometimes be too much. People can only deal with so much stress before something gives way. Sometimes the best option to get rid of the calls and the stress is to file for bankruptcy.

If you are in this situation please remember that if there are other options available to you, take them! Bankruptcy can get rid of the creditors, but don't file for it unless your debt, credit score, and overall financial situation seems hopeless and impossible to work off.

Reason #6: Medical bills

Medical expenses have caused many families to file for bankruptcy. Whether you are middle-class, low-class, or somewhere in-between, the cost of medical treatment is steep and scary. One of my own close friends is currently struggling to pay a bill that her insurance didn't cover, and she only had a doctor remove a piece of food that had gotten lodged in her throat.

If you're in a situation where you're being crushed by paying a medical bill off and your financial state is in ruins, then filing for Chapter 7 bankruptcy can help you to reduce or possibly even eliminate your medical bill.

Reason #7: A new start

After you have filed filed for bankruptcy and completed the payments that you are responsible for under it, some people have found that it gives them a fresh start. This is not to say that your slate gets wiped clean - you can have the fact that you filed for bankruptcy on your credit report for ten or more years.

However, you will be: out of debt, free of creditor harassment, and (hopefully) have a higher credit score than you did before you filed for bankruptcy. All of these things can help you to feel better about yourself, and provide you with a figurative goal or 'light at the end of the tunnel'.


At the end

Hopefully these reasons will help you should you be in the position where bankruptcy seems like a possibility. Remember though... Filing for bankruptcy should be your last resort. If you have any other option (such as cutting your budget) you should definitely take it.

Also, before you file for bankruptcy, you should consult with a credit counselor to determine whether or not it would be in your best interests.


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What If I Want To Sell My Home During Chapter 13 Bankruptcy?

If you’re in Chapter 13 bankruptcy and you want to sell your home, there are few things you need to know before you proceed:


1.The bankruptcy court must approve the terms of the sale before a debtor closes on the property.

2.The debtor’s bankruptcy attorney must notify all of the creditors in the bankruptcy before the property is sold.

3.You and your bankruptcy attorney must disclose the details of the proposed sale to both the creditors and the bankruptcy court before you can proceed. Those details should include, the home’s sale price, proof of the property’s current value and the details of how the proceeds from the sale will be disbursed to the creditors. That takes us to our next point.

4.Your bankruptcy attorney must provide the bankruptcy trustee and creditors with a detailed account of all deductions made and profits earned from the sale of the home. All proceeds from the sale of your home during Chapter 13 bankruptcy become part of the bankruptcy estate and must be paid directly to the bankruptcy trustee. The bankruptcy trustee will then disburse the proceeds from the sale to the creditors.

It is possible that after selling your home in Chapter 13 bankruptcy you will not see any of the proceeds of the sale. The question then becomes, should you sell your home during Chapter 13 bankruptcy? Well, it depends. If it is your primary home and you can afford the payments it may not be a wise decision. However, if it is a second property that you are struggling to pay for, it may be wise to proceed. But before you sell any property, work with your bankruptcy attorney to create an effective plan. A matter of fact, you should create a plan with the help of your bankruptcy attorney before you file.

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What is Bankruptcy?

While searching the internet and posting blogs, I realized that it has been awhile since this blog dealt with what bankruptcy actually is. To make sure that you are aware of whether or not you should pursue this option, here is some information that I have pulled from various sites (which are linked below) to help you out.

Two Types of Bankruptcy

While there are many types of bankruptcy, here are the two most commonly filed chapters (or types). For a full list of the requirements and your potential eligibility concerning bankruptcy, you can get a free consultation with a bankruptcy attorney, consultant, or a similar expert.

1) What is a chapter 7 bankruptcy? (a more thorough explanation can be found in our September 27th post)

"Under the federal bankruptcy statute, a discharge is a release of the debtor from personal liability for certain specified types of debts. In other words, the debtor is no longer required by law to pay any debts that are discharged. The discharge operates as a permanent order directed to the creditors of the debtor that they refrain 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. Although a debtor is relieved of personal liability for all debts that are discharged, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien."

2) What is chapter 13 bankruptcy?

"In a chapter 13 case you file a plan showing how you will pay off some of your past-due and current debts over a period of three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property, like your home or car, even if you are behind on payments or you have equity not covered by your exemptions. Your payments on these secured debts will generally be your regular monthly payments plus some extra amount if you need to get caught up because you are behind when you file."

Experts in this field can be found in your local area or through sites such as http://www.debthelper.com/.

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Experts Answer your Bankruptcy Questions

The Dow may be over 10,000, but unease about the economy persists as unemployment hovers over 10%. To help ease some of your concerns, WalletPop is ready to answer your personal finance questions. Here's this month's sample:


Question: My wife and I are in debt that I no longer can tolerate. I am retired and have burned through my 401(k) and my annuity to pay the $6,000 a month in mostly credit cards and home mortgages.

What are my options? I don't think we qualify for Chapter 7 bankruptcy. What about Chapter 13, and what does that entail?? Do I need an attorney? How do I keep creditors from calling me day and night?

--Gary Anders

Answer from James Caher, co-author of Personal Bankruptcy Laws for Dummies

"Bankruptcy is definitely something you should look into, since it looks like you're sinking fast and probably wasting your retirement paying debts that you might be able to eliminate in bankruptcy. But there are many, many things to consider.

"I suspect that you may very well qualify for Chapter 7 (the one that does not involve a repayment plan of any kind), since you are living on retirement income. But this depends on whether your income exceeds the median income for your state, which is probably around $4,300/month before taxes. Social Security income does not count. Even if your income exceeds the median, you may qualify for Chapter 7, but you would have to pass the Means Test.

"You might not want to file a Chapter 7 if the equity in your home exceeds the allowable exemption in your state. For example, assume that your home is worth $200,000 with mortgages totaling $150,000, leaving $50,000 in equity (the difference between the value of the property and the mortgages). If your state allows a homestead exemption of $50,000 or more, you won't lose your home in a Chapter 7 -- provided you keep up with your mortgage payments.

But if your state allows, say, $15,000 for a homestead exemption, a Chapter 7 trustee could sell your home, pay off the mortgages, pay you $15,000 and pay the rest to creditors.

Chapter 13 is different. Property is not liquidated. Instead, folks pay what they can afford for the next 3-5 years, and remaining balances are wiped out. If you are behind on your mortgage, you can use Chapter 13 to catch up on back payments by stretching them out over 3-5 years while continuing to make regular payments going forward. Yes, you should consult with an experienced bankruptcy lawyer for advice tailored to your particular situation, but you can get a very good idea about your options from our book, Personal Bankruptcy Laws for Dummies.

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67 and Bankrupt: Are the Kids to Blame?

Larry and Abby are in their late 60’s. They are broke, about to lose their home and there is nothing they can do about it.
But it didn’t have to be this way.

10 years ago, they had over $500,000 saved on top of the two rental units they inherited when Larry’s mother passed away. At the time, Abby owned a successful small business and had a comfortable income. Everything looked like peaches and cream.

So what happened?

Patrick happened.

Pat is their son. He borrowed money from his parents seven years ago to open his auto repair business. Pat was a great mechanic but a horrible business person.

Larry and Abby just wanted to help their boy. They convinced themselves that the money their were forking over was just a loan. They were sure Patrick would pay them back some day.

But as the days passed, the likelihood of seeing that money again grew smaller and smaller.

He slowly drove the business into the ground.

But each time he feel deeper into the hole, Larry and Abby were there to bail him out. They were sure that all Pat needed was a little more working capital.

Of course, this enabled Pat to amass even greater debt. Within three years he exhausted all his parent’s savings. They had to sell all the real estate they inherited and they refinanced their home as well. Even after going through all that, Pat was left with debts of over $300,000 including $150,000 to the IRS.

He was much too proud to close the business. He was determined to make it successful – even if it meant spending every last dime his parents had.

So was Patrick to blame for Abby and Larry’s financial destruction?

Not in my opinion.

Abby and Larry volunteered to become an ATM machine for Patrick. Nobody put a gun to their heads. But that wasn’t really the root problem.

You see, the reason they wrote blank checks to Pat was because they didn’t take the time to think about what impact their decisions would have on their own financial future.

They were very mindful about their spending – except when it came to supporting their kids.

Pat needed money.

They wrote him a check.

It was automatic – and it was ridiculous.

Abby and Larry put their heads in the sand. They didn’t pay attention to their own financial plan. In fact, they didn’t have one.

Sure they had assets and income. But even though their estate was worth over $2.5 million at the high point, it didn’t last long once they started writing checks for $50,000 every other month to keep their kid in business.
I know this is an extreme example. You might not be sending huge amounts to your children….but the amounts don’t matter. And it also doesn’t matter how your kids spend the money you give them. I don’t care if they use your money to open a successful business or go to Harvard. If you can’t afford it then you can’t afford it. Period.

How do you know you can afford the support you give to your kids? Have you ever said “no” to your kids when they asked for financial help? How did that impact your relationship?

If you are on the receiving end of this, do you have an obligation to your parents to discuss the ramifications of their support?

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Student Loan Debt — Dischargeable In Chapter 13 Bankruptcy?

Anyone who has ever taken out a student loan is quite aware of the fact that student loan debt is next to impossible to discharge in bankruptcy unless the debtor can prove “undue hardship.” But the 9 th Circuit Court ruled in October that student loan debt could be discharged through the confirmation of a Chapter 13 plan if the creditor is given notice of the plan and does not object, (Espinosa v. United Student Aid Funds Inc., No. 06-16421, 9th Cir. 10/02/08).


The court stated:

“Our long-standing circuit law holds that student loan debts can be discharged by way of a Chapter 13 plan if the creditor does not object, after receiving notice of the proposed plan, Pardee, 193 F.3d at 1086, and that such notice is not constitutionally inadequate. In re Gregory, 705 F.2d at 1123. We find it highly unlikely that a credi­tor whose business it is to administer student loans will be misled by the customary bankruptcy procedures or somehow be bamboozled into giving up its rights by crafty student debtors. If the creditor fails to object, it is doubtless the result of a careful calculation that this course is the one most likely to yield repayment of at least a portion of the debt. In such circumstances, bankruptcy courts have no business standing in the way. Cases such as In re Webber and In re Patton are, to that extent, overruled.”

Although this ruling should not be considered an open door for all who want to discharge student loans in bankruptcy; it is a long overdue relief for debtors who are burdened by massive student loan debt. If the Chapter 13 bankruptcy trustee has examined the debtor’s ability to repay his/her student loan debt and has determined that the balance of the student loan should be discharged in Chapter 13 bankruptcy, then it is up to the creditor to accept or dispute the ruling. No special provisions should be given to student loan creditors who do not follow bankruptcy proceedings and challenge discharge rulings according to the law.

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Personal Finance 101: What Does FDIC Insurance Really Mean?

One of the biggest things I encourage people to look for when they open a bank account is that the bank is FDIC insured. Most banks operating in the United States offer this insurance. In an era where people are more than a little worried about bank failures and the like, FDIC insurance is vital.


But what exactly is it?

Charlie writes in:

What exactly is FDIC insurance? How does it work? [A local bank] went under recently and seems to have been bought out by another bank and from what I understand the accounts are intact. Is that FDIC insurance at work?

(I edited out the bank in Charlie’s question for privacy reasons.)

What Is FDIC Insurance?

FDIC insurance refers to insurance policies created by the Federal Deposit Insurance Corporation, which is an organization wholly run by the government of the United States. The FDIC sells insurance policies to banks which insures the checking and savings accounts at those banks against the failure of those banks. Thus, when you open an account with a bank, that bank purchases insurance on that account for you from the FDIC.

FDIC insurance covers checking accounts, savings accounts, certificates of deposit, money market accounts, and cashier’s checks. It does not cover stocks, bonds, mutual funds, money market accounts, US treasuries, safe deposit box contents, or other such items.

Most banks that operate in the United States buy this insurance. When they do, they’re required to display the FDIC logo on signs in their business as well as on their websites.

FDIC insurance insures deposits up to $250,000 per depositor. This means that if your bank fails, the first $250,000 in your account is insured by the FDIC and will be returned to you in the event of a bank failure.

What Happens If My FDIC Insured Bank Goes Under?

If a bank that offers FDIC insurance becomes insolvent, the FDIC takes over that bank and all of the accounts held there. One of two things then happens.

In one type of takeover, called the “purchase and assumption” method, an already-existing bank takes over the accounts of that bank as well as some (or all) of the loans that bank has given out to customers. This purchase is usually done quickly. For you, the customer, this means that one morning, you’ll wake up and your bank account will be with a new bank. This is what happened when Wachovia failed and was taken over by Wells Fargo, for example.

In another type of takeover, called the “payout” method, the FDIC liquidates everything that’s left in the bank and then issues payouts for insured amounts to customers. So, if you have less than $250,000 in your accounts, you’d receive the full amount – if you had more, you’d just receive $250,000.

In either case, the process is really straightforward, usually involving minimal hassle from the customer. At most, you’ll simply need to open an account at a different bank (if your bank isn’t bought out or if you don’t like the new bank).

What If My Bank Doesn’t Have FDIC Insurance?

If your bank fails, you’re out of luck. You get nothing at all.

This is the reason why I encourage people to use banks that provide FDIC insurance. Luckily, almost all banks in the United States do offer it, but it’s worth checking just to make sure.

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FDIC Officially Goes Bankrupt

From today's FDIC quarterly, there is final confirmation that the Deposit Insurance Fund is negative $8 billion.
by Jake Towne, the Champion of the Constitution

WASHINGTON, DC - Today the FDIC released its quarterly report, revealing that the Deposit Insurance Fund is bankrupt and now stands at negative $8.2 billion dollars. (page 13/26) Central planner and FDIC Chairwoman Sheila Bair has confirmed separately that future bank failures will be funded by the bailout fund allotted to the FDIC.

If you are new to the US banking scheme, you might question why banks and the FDIC are going bankrupt -- don't they HAVE all the money? The answer is they do not, banks in July 2008 had lent out about 99.4% of all the money they had on deposit. This is despite the rather insane truth that the Federal Reserve can create more money whenever it desires.

The FDIC had predicted its bankruptcy in a September letter. I had been following the FDIC closely for the past 18 months, but I finally threw my hands in the air after seeing how the report was rigged to keep the DIF fund positive in the Q2 2009 report, as I reported in "FDIC: 'We Aren't Bankrupt and Everything is A-OK.'"

However, the best friends of the FED banking cartel, the United States Congress, has a lot more nice surprises in store for America's working class. Politicians like to wave around one hand as they mess around with the other hand behind their backs, out of sight. While all the fury of the concerned is focused on the health care spend-and-tax bill, HR 3996, dubbed by yours truly as the "Automatic Bailout Bill" will grant the FED the ability to bailout any "individual, trust, or corporation" (section 1701) as well as impose a bureaucratic system of unneeded regulations.

Source: FDIC