According to the US Department of Labor’s Bureau of Labor Statistics, unemployment rate in 2012 was 7.9; in 2013, 6.7; and, in 2014, 5.6. This was from a high of 9.9 during the Great Recession from 2008 to 2009. Unemployment may suggest a negative meaning (such as when people are laid off or quit their work while looking for a new job); however, it may also suggest something positive, which would be the case when a company makes technological improvements, replacing human workers with machines for consistently fast work output, or when a job is outsourced. For workers who have been displaced from their work, however, unemployment will mean only one: financial problems.
The monthly pay of millions of wage earners in the U.S. is just enough salary to enable them to cover their basic needs between salary dates. Losing their source of income, even for just a month or two, can result to unpaid monthly bills, loans or mortgages – the possible start of a crushing debt crisis.
Banks give debtors the chance to settle late payments for their loans; however, after being continuously delinquent for about three months, rules will require these banks to consider unpaid bills as bad debts; banks will then refer a debtor’s account to a collection agency, which does not shy away from using hounding tactics in order to make a debtor pay.
Besides their huge debts that have become impossible to pay, debtors also experience too much stress and sleepless nights due to the thought of possibly losing their home or car; add to these too the text messages, letters, emails, phone calls and other forms of harassing tactics from collection agents.
But rather than allowing debtors to legally suffer the consequences of their delinquency or inability to pay, bankruptcy may be the best option.
The Bankruptcy Code, which completely replaces the Bankruptcy Act of 1898, also called the Nelson Act, was enacted by the U.S. Congress in 1978. It is composed of various Bankruptcy Chapters: 7, 9, 11, 12, 13 (and Chapter 15, which was added to the Bankruptcy Code in 2005), each designed to address the specific financial situation of those seeking protection under the Bankruptcy law.
Records from the United States Courts show that from 2010 to 2013, the average number of bankruptcy applications filed in various U.S. federal bankruptcy courts was 1,358,104. The average number of applications filed during the same years under the different Chapters is as follows:
- Chapter 7 = 952,948;
- Chapter 11 = 11, 583;
- Chapter 12 = 582; and,
- Chapter 13 = 392, 879.
Chapter 7, the bankruptcy chapter most commonly applied for, involves liquidation. This chapter requires a debtor to surrender all of his/her “non-exempt” properties for liquidation and cease operation of his/her business if he/she has one. Non-exempt properties usually include a vacation home, a second house, expensive musical instruments (but only if the debtor is not a musician by trade), cash, bonds, stocks and other forms of investment. Exempt properties, on the other hand, include items which are considered necessary for working and living; a number of examples are a house, a vehicle (or vehicles but only up to a certain value), clothing, necessary household appliances, personal injury compensation, tools necessary to the debtor’s trade or profession, and jewelry (up to a certain value).
A court-appointed trustee will take charge of the liquidation of the debtor’s non-exempt properties and use the amount earned to pay all of his/her non-dischargeable debts, such as child support and alimony or spousal support, court fees, government-imposed penalties, debts resulting from wrongful death or personal injury, student loans (unless debtor would suffer “undue hardship” if he/she were to keep paying these), and taxes (federal, state, and local) that are no more than 3 years old since these first became due. If the amount of liquidated properties is more than enough to pay all non-dischargeable debts, the remaining amount will be returned to the debtor. Otherwise, creditors will have to accept the (legally determined) amount they are paid, even if this falls short of the actual amount owed to them. Besides this, they should also follow a decision made by the court which is to forgive any balance from the debt and to stop any further collection of payment, or suffer severe penalties under federal law.
With regard to other debts, which include medical bills, past utility bills, personal loan from employer, family or friends, and, most especially, credit card bills, all of these are considered dischargeable debts, thus the court automatically frees the debtor from any further obligation of paying these, at the same time ordering creditors to cease any form of collection from the debtor.
Once bankruptcy is filed in court, all interest charges on loans as well as all legal and harassing tactics from creditors will be ordered by the court to cease; this is called the “automatic stay.” Even a single attempt by a creditor to try to make a debtor pay can result to legal consequences against him/her.
Each bankruptcy chapter has requirements which will determine qualification. For chapter 7, an applicant is required to take a means test – this is to determine if his/her salary is within the limit set under this specific chapter.
Though the bankruptcy law may be confusing, to a highly-knowledgeable and experienced bankruptcy lawyer, all legal complications may easily be addressed and the debtor, helped in determining which bankruptcy chapter will exactly work for his/her benefit.