For generations of Americans, declaring bankruptcy was viewed as one of the most embarrassing and socially destructive acts ordinary citizens could contemplate. Taking out any debts – even student loans and home mortgages – was considered somewhat suspicious and a grave responsibility to be repaid as quickly as possible. The rise of the automobile and accompanying financing changed all that, of course, along with the increase in credit card availability, and soon borrowers would depend upon credit for most every purchase. A dangerous situation, and, as our economy begins to flounder, it’s no surprise that more and more debtors have trouble keeping up with mounting bills – and, alongside, first considering bankruptcy.
Far from the days when a humiliating social stigma was attached to bankruptcy, almost two million Americans filed for some sort of bankruptcy protection last year. Originally, the program was intended to help only those suffering a severe financial mishap (lingering unemployment or medical emergency, say) by liquidating consumer debt or allowing the balances to be restructured, but, with the spiraling personal debt-loads, an increasing number of borrowers are forced to at least investigate their options.
Several different sorts of bankruptcies have been instituted over the past century with specific protections meant to safeguard everyone from family farmers and fishermen to foreign companies doing business in America to cities and countries themselves. For the purposes of this articles, we’ll concentrate solely upon the two most popular forms for individuals and families
the most common type of personal bankruptcy and what most people think of when they hear the term. Under the Chapter 7 plan, most unsecured debt – meaning those debts absent collateral such as mortgages on properties or vehicle loans; spousal and child support, tax liens, penalties for criminal misdeeds, student loans and certain other types of debt are never considered eligible for discharge – would be eliminated, but there are several drawbacks most consumers still are not aware of. 2005’s Bankruptcy Reform Act, for example, not only restricts the type of debts that could be liquidated and lessens the safeguards preventing harassment from creditors and collection agencies but also requires those seeking bankruptcy to take a debt management course for six months before they file and again before the bankruptcy is finally discharged – all at the debtor’s own (considerable) expense.
The most obvious repercussion, of course, concerns the filer’s credit. Bankruptcy notations can remain on credit reports for up to ten years, preventing potential borrowers from qualifying for future financing (and, in those rare instances when credit would be approved, forcing impossibly high interest rates), and initiating a sudden and extreme drop in FICO credit scores. In some cases, security clearances and employment opportunities would be denied because of a bankruptcy from decades past. However common the practice may be seeming in modern culture, the severity of bankruptcy is still not lost for creditors, employers and the government.
Most people know they’ll see an inevitable decline in credit and associated opportunities (even if they downplay the actual effects), but the most ruinous consequence lies as soon as bankruptcy’s declared. In the original filing, the borrower must compile a list of every single personal or family possession – not just commonly-recognized assets such as luxury goods or liquid (easily sold) investments but household goods; children’s toys or gaming equipment; entertainment systems and musical instruments; even precious heirlooms handed down through the generations. The dollar amount of all property’s then compiled according to expected replacement value (not, after recent legislation, the salable value) and seized by the court trustees to be auctioned off in order to partially repay the debtors. There are, of course, exceptions that range widely from state to state, especially if the court deems the asset vital to familial support or personal income, but one should never assume anything would be guaranteed safe from seizure. Under current regulation, even retirement accounts such as IRA may not be entirely protected