Feature Articles: Financial Information & Tips
Brenda Procter, M.S., State Specialist and Instructor, Personal Financial Planning; Marilyn Preston, M.S., former Graduate Assistant, Human Development and Family Studies, University of Missouri Extension
If you have reached a point where you can see no way to pay your bills and bill collectors are constantly calling you, bankruptcy might be your last option. It is not a step to be taken lightly because of the effects it will have on your perceived credit worthiness for years to come.
Before taking that step, it is a good idea to consult with a reputable consumer credit counseling service to see if they can work with creditors to restructure your debt payments and avoid bankruptcy. DebtAdvice.org is a website sponsored by the National Foundation for Credit Counseling. It has an online locator to help you find the nearest reputable nonprofit credit counseling service in Missouri.
What is bankruptcy?
Bankruptcy is a legal proceeding that may allow someone who cannot pay his or her bills or debts to get financial relief and avoid some or all of those debts. Bankruptcy cases are filed in federal court because federal law grants the right to file bankruptcy.
What are the different types of bankruptcy?
There are four types of bankruptcy:
Chapter 7 is also known as personal bankruptcy and is the most common type of bankruptcy. It often results in the total elimination of nearly all of a person’s unsecured debts and it stops debt collectors from trying to collect more money.
In a Chapter 7 bankruptcy, a trustee is appointed to take over your property and sell off any assets of value (except in some cases, varying state by state). The money made from the sale of your assets (property, cars, etc.) goes to pay some of your creditors.
As soon as your bankruptcy petition is filed, the law prohibits most collection activity. If a creditor continues to try to collect the debt, the creditor may be cited for contempt of court or ordered to pay damages. This applies even to the loan that you may have obtained to buy your car. If you continue to make payments, it is unlikely that your creditor will do anything. However, if you miss payments, your creditor will probably petition to either repossess the car or renegotiate the loan.
Chapter 11 is a type of bankruptcy that applies mostly to businesses. It allows the business to stay in operation, but mandates a plan to pay off debts.
Chapter 12 applies only to family farmers or family fishermen. It allows families to keep their assets, but it appoints a trustee to take over the budgeting and pay the creditors over time.
Chapter 13 bankruptcy allows individuals and families to keep their assets, but similarly to Chapter 12, it requires a trustee to oversee the repayment of debts. To qualify for this type of bankruptcy, you must have a regular and steady source of income and agree to pay a portion of your income to your creditors.
Your bankruptcy will be on your credit file for up to 10 years and can affect your ability to receive credit in the future — so consider all your options before you file!
Will bankruptcy get rid of all my debts?
Probably not. Bankruptcy cannot clear debts for:
- Child support
- Most student loans
- Court fines and criminal restitution
- Personal injury caused by drunk driving or driving under the influence
If you have secured debts with collateral (like a house), you will have to continue to pay those debts.
What are the advantages of filing for bankruptcy?
The biggest advantage is that you can get a fresh financial start. If you are eligible for Chapter 7, most of your unsecured debts may be forgiven. A secured debt is one that the creditor can collect by taking back and selling the collateral that secured it if payments are missed, like a home mortgage or car loan. With those two major exceptions, most consumer debts are unsecured.
You may be able to keep some of your assets depending on your situation. You cannot be fired from your job solely because you filed for bankruptcy.
What are the disadvantages of filing for bankruptcy?
Since your bankruptcy will stay on your credit record for up to 10 years, it may negatively affect your finances in the future. A bankruptcy is a blemish on your credit record, but often people who file already have a troublesome history.
In one respect, bankruptcy may improve your credit records. Because Chapter 7 provides for a discharge of debts no more than once every eight years, lenders know that a credit applicant who has just emerged from Chapter 7 will not be able to file for bankruptcy any time soon.
Research in this area is mixed. A study by the Credit Research Center at Purdue University found that about one-third of consumers who filed for bankruptcy were able to get lines of credit within three years of filing, and one-half were able to get lines of credit within five years. That new line of credit, however, may have a high cost because of bankruptcy. Although you may have been eligible for a bank card with a 14-percent rate before bankruptcy, the best card that you can get after bankruptcy might carry a rate of 20 percent or higher. Another option would be a card secured by a cash deposit that you make up front with the credit card issuer.
How do I file bankruptcy?
You will need to work with a bankruptcy attorney. The Missouri Bar and some local bar associations in the state's bigger cities have lawyer referral services to assist in finding a lawyer. To find a local lawyer who handles bankruptcy cases, call either your local lawyer referral service listed in the Yellow Pages (in St. Louis, Kansas City and Springfield) or call The Missouri Bar Lawyer Referral Service at 573-636-3635. You also may use the Find a Lawyer feature on The Missouri Bar's website (mobar.org) to find a bankruptcy lawyer in your area. You may want to talk to more than one lawyer to find the one you are most comfortable dealing with.
Under the law, you must have credit counseling before filing for bankruptcy and more financial counseling before your debts are cleared. A filing fee is required for all bankruptcy cases and the amount of the fee varies depending on the type of case.
You may not qualify for Chapter 7 bankruptcy if your income is too high, and instead have to repay some of your debts under Chapter 13. In order to figure this out, the courts will do a means test to see if you qualify for Chapter 7 bankruptcy. If you have more than a certain amount of money left over each month after paying all bills, you may have to file for Chapter 13 bankruptcy and continue to pay some of your bills.
Arkansas Legal Services Partnership. (November 2006). Bankruptcy.
The Federal Trade Commission (October 2005). Bankruptcy Information Sheet.
Bankruptcy Public Information Brochure, Missouri Bar Association. Downloaded from http://www.mobar.org/a709181d-daa0-4dfe-97e1-21cbc7c3e667.aspx, January 12, 2010.
Arkansas Legal Services Partnership. (November 2006). Bankruptcy.
Legal Help Check List. Missouri Bar Association. Downloaded from http://www.mobar.org/8eead604-aab6-4375-a61c-3ebf173510e2.aspx, January 12, 2010.
Bankruptcy Pros and Cons. Division for Public Education, American Bar Association. Downloaded from http://www.abanet.org/publiced/practical/bankruptcypros.html, January 12, 2010.
Last update: Wednesday, October 12, 2011