<p>No, I’m not that bad off, yet. But I had coffee with an acquaintance last week – she’s separated from her husband for five years, but not yet divorced; she says she’s three months away from being foreclosed on her home; and she’s working as a cafeteria lady for three hours a day at a local school. No real income, no prospects. She’s talking about bankruptcy. What does that really mean??</p>
<p>In general, a chapter 7 (the most common personal one) means you present the court a list of all your debts, all your assets, and your salary info.</p>
<p>I do not know the newer rules about how they determine whether you qualify to go BK, but essentially there are assets you can keep and ones you cannot; if you have any assets which are not protected, you forfeit those. The debts are wiped out and the assets which were forfeited are sold with the profits supposedly going to the people who are owed.</p>
<p>I hate to be cynical, but in my experience, being owed, when there were substantial assets (6 figures) in a business that went bust, the trustee managed to have $0 of that money available to pay anything towards the debts. It was gossiped that trustees will keep digging and billing until they use up the available money. In that BK no unsecured lender got a penny and there was a decent amount of money there.</p>
<p>Bankruptcy=Liabilities>Assets.</p>
<p>somemom, when you talk about your experience, is it that you as a business person were owed money by another business? Or you as a business were owed money by an individual? Are there differences?</p>
<p>For a personal bankruptcy, would a primary residence be a protected asset? I assume the mortgage wouldn’t be wiped out – that could be a windfall for too many people.</p>
<p>Primary home protection would depend on state law protections. I am not familiar with CT law, but the federal exemption is only around 18,500, but a state can opt out and set its own limits. In FL for example it is much more, but not millions or multiple hundreds of thousands. However, in a bankruptcy, where there is a mortgage, the lender will have some serious say in the disposition of the property, it is after all, what secures the debt. This is a bit different from other non secured debts, which most others will be. The secured lender has first dibs on the asset, due to the mortgage. This is a special type of debt. I could give a whole hour’s lecture on what a mortgage is, and the history, but I won’t bore you. Sorry for your friend.</p>
<p>Another way to think about it is that the creditors get in line to get a share of whatever non-protected assets you have. Various rules control who stands where in the line. The creditors get paid some portion of what they are owed, depending on the rules. Then the remaining debts may be discharged, or forgiven.</p>
<p>A really, really important thing to know about personal bankruptcy is that with rare exceptions, student loan debt cannot be discharged. Mortgages on homes can’t be wiped out either, but one much-discussed possible change in the law would allow bankruptcy courts to alter the terms of the mortgage.</p>
<p>So if an individual declares personal bankruptcy, the nonsecured debts are ultimately paid off, in small part, by whatever assets exist – ie, a house, a car (maybe). </p>
<p>If someone has huge credit card bills and no tangible property, it might not be a bad thing to declare bankruptcy. There’s nothing to “seize” to pay off the creditors. Yes?</p>
<p>I assume the individual’s credit is shot for gazillion years, of course, and they can’t get credit of any sort – credit cards, PLUS loans, mortgage, car loans – for some lengthy period of time. </p>
<p>Basically they’re wiped out and have to start over again, but with the disadvantage of not being able to create a good credit history.</p>
<p>What determines whether someone declares bankruptcy at one point in time versus another? I know that’s a broad question, but is it when the pressure of collection agencies becomes too great? When someone just wants to start over? Other considerations?</p>
<p>FYI, my sister who filed for bancruptcy a little over three years ago, is a single parent. She has worked hard on her credit by doing alot of research and building it up, she just purchased her own home:D</p>
<p>4Giggles, your sister must be lucky. Many lenders will not extend credit when they see a bancruptcy. I believe that a brancruptcy is on your record for 10 years. Also, you do not necessarily get to keep your house (ie: if you have not kept up with payments, and there could be other exceptions).</p>
<p>Many people do indeed lose their homes home in bankruptcy. Most states have “homestead” exemptions, which exempt up to a certain dollar value of equity in your home from creditors’ claims. Frequently, this exemption is considerably smaller than the value of one’s equity in a home (e.g. $75,000 - Connecticut, $60,000 - New Mexico, $7500 - Illinois, Alabama - $15,000, $50,000 single/$75,000 married - California). Florida and Texas, among others, are known for having very large or unlimited exemption amounts for a primary residence. The homestead exemption typically also allows you to keep certain furnishings, automobiles (up to a certain value) and personal items out of the bankruptcy estate.</p>
<p>Under bankruptcy reform laws enacted in the last few years (Bankruptcy Abuse Prevention and Consumer Protection Act, 2005), certain debts can no longer be discharged in bankruptcy. These debts include student loans and certain credit card debt.</p>
<p>I’m not sure if I uderstood this correctly, but a close friend of ours in NJ, thought they would have to file for bankruptcy. It was basically because the H couldn’t stay in business any longer. But he has a “C” corporation, so that basically his company could go bankrupt without necessarily making him file personally. She also told me, that because the house was held in both names, that there were rights of surviorship issues, meaning that no creditor could force the sale of the house (in the event husband signed personally on anything). So, in this case as long as they keep up on the mortgage, the house is safe. Which to them was a huge concern, because even in this down market, eventually they could buy something smaller, etc. I know this is a different situation, but just more information. She also said, that the lawyer said, that if they ultimately decide to go bankrupt…there definitely are ways to rebuild your credit. He too, pointed out that its not easy, but he knows people that have managed to get car loans and mortgages within 2 yrs, by getting a “secured” credit card, using it monthly and making the payments. </p>
<p>So many people are going through this right now, thru no real fault of their own. Its so sad. I had Tru TV on the other morning…it was still on that station from the night before…anyway, they were actually doing a show “Bankruptcy Court”…showing the awful situation that is happening in Ft. Myers, Fl, and other states. But, the sheer number of people being foreclosed on was heartbreaking. One woman said, you know…People are saying things like, well its their own fault for getting a house they couldn’t afford. She said, when we bought this house, I had my own business making over $140K a year, my husbands salary was about the same. We bought of 4 bedroom house, nothing outrageous, with only a $180K mortgage. Her company went bust, (title company), husband was a contractor of some kind…no work. So now they can’t make the payments. But her point was, they couldn’t foresee these types of failures across the board. Its not really thier fault. This story was repeated over and over. They said there are over 500 foreclosures a week in Ft. Myers alone, with many people trying to rebid on thier own lost houses. The banks would rather take back the property from a couple who wants to save thier home…resell it at a big loss, rather then working with the actual family living in the home.</p>
<p>This whole topic makes my heart break for so many hardworking families that just can’t get a break. I’m so sorry your friend is going through this. I personally would suggest she contact her creditors before filing…and see if they can work out payment plans with her. At the very least she should see an atty for advice on what her best options are. There are lawyers out there who will offer a free consultation, but at least she can get some good working suggestions for her own personal situation.</p>
<p>VeryHappy - I agree with papangena, your acquaintance should see a lawyer – the sooner the better. There’s a web site that discusses bankruptcy in Connecticut. It will answer some questions, but it’s better at “discussing” than “explaining” IMHO.</p>
<p>[Connecticut</a> Bankruptcy Laws from ConnecticutBankruptcyLaw.com](<a href=“http://www.connecticutbankruptcylaw.com/]Connecticut”>http://www.connecticutbankruptcylaw.com/)</p>
<p>I would also have her check out the Endorsed Local Providers on Dave Ramsey’s website.</p>
<p>papengena- your friend needs to be very careful if her husbands corporation had any trust fund tax liability (sales tax, income tax withholding and others) the fact that the corporation goes bankrupt does not protect him. He is still on the hook for those taxes, penalties and interest as well as other fees assessed when a business does not pay those taxes when due. I have seen many instances when an officer is made to pay those obligations and their sole argument is that the business filed bankruptcy and everything was discharged. The answer is not against you it wasn’t.</p>
<p>Thanks Tom, I’ll pass that along. At this point, I don’t think there are any outstanding tax obligations…but, I don’t really have all the facts. I know they are working with an attorney, who is much more qualified then I am…lol. I was just sharing what she told me was happening with them.</p>
<p>No matter how you look at this, its desparately sad. Her husband is in his early 60’s…can you imagine how hard it will be for him to find a job in this market? Particularly after being self-employed for over 25 yrs. Ugh. There just seems to be no answers for anyone these days.</p>
<p>I personally feel we are in a depression, NOT a recession!!</p>
<p>VH- it a group of my parents & their friends who invested together in RE a couple of recessions ago 
One guy went crazy and sued for his money in cash, but the market was like it is now. He forced a fire sale and whilst there was cash generated over $100k, no one got any money except a creditor in a recorded first position on any given property.</p>
<p>It was amazing to me. As I recall there was both a personal and partnership BK. Sadly if that one person had not forced sales of multiple pieces of RE, but just held on for the recovery, every one would have been made whole and likely made money. Most shocking was to attend the proceedings and watch the trustee eat up ALL cash generated.</p>
<p>Also, my understanding is that you don’t necessarily lose your credit cards, IF your card is paid in full the day of BK, they don’t necessarily come along and take it from you. If you discharge debts they will and what with cc’s checking your credit and changing terms, they may do that any way.</p>
<p>Also, an attorney may advise them if they can keep their homes (depends on the value, the debt against it, the state protections, etc) and if so they would want to keep up the payments and keep the house (that of course assumes the home is not the main problem, this is more if a business goes BK and one is trying to protect their personal life) I work in the financial field, but not that dept, so I just know what I have seenor heard in specific client cases and none recently</p>
<p>Every society of any sophistication has some set of rules for dealing with someone’s inability to pay his debts. There is bankruptcy law scattered throughout Deuteronomy and Hammurabi’s Code. Bankruptcy rules serve two basic functions. One is striking a balance between the right of creditors to be paid, and the right of the individual to basic human dignity, as well as the undesirability from a social point of view of having a potentially productive individual with no incentive to produce because he can’t derive any benefit from it. The other is the need to ensure fairness among different creditors. Without bankruptcy rules, the first creditor to take aggressive action would walk off with all the value, leaving any other creditors in the lurch. That in turn would raise the cost of financing exponentially, because creditors would have to spend resources watching out for one another, and because any kind of financial difficulty a debtor had would produce hairtrigger responses from creditors afraid of being disadvantaged.</p>
<p>Our system is complex and technical, and something of a hodge-podge of inconsistent rules. But the core principles are pretty clear: With important exceptions, an individual has the right to walk away from his debts and to get a “fresh start”, with something more than the clothes on his back, if he turns over all of his assets – except the exempt ones, starting with those clothes – to a neutral trustee who will distribute them in a fair and predictable manner among all of the various creditors. Or, if it makes sense, the individual’s debts will be restructured in a manner that lets him pay them off on feasible terms, given his earning capacity, with supervision by a court. As among creditors, the neutral trustee and court will determine who has valid claims, and how much the valid claims really are, and what priorities the claims have among themselves, and the creditors with each class of claims are treated equally in proportion to the amounts they are owed. The trustee will also, on behalf of the creditors, work to identify and to collect everything of value the bankrupt owns, and to recover assets he may have given away improperly or hidden, or which were grabbed by a creditor who should be sharing them with other creditors. The trustee, of course, doesn’t work for free, and is paid out of the bankrupt’s available assets, which also are available (before creditors are paid), to pay some of the bankrupt’s cost of protecting himself and some of the creditors’ costs or participating in the bankruptcy. The same principles apply to business bankruptcies, except in a much messier way, and without any right of the business to survive and get a fresh start.</p>
<p>Apologies if someone else has mentioned this, but most money, up to $1million, can be more, in 401Ks and IRAs is protected. That is another reason why I put every penny can away there.</p>