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Q: Why are so many consumers filing bankruptcy?

A: Many Americans with excess debt have acquired that debt over a long period of time. While the great majority fully intend to repay their debts, they may find themselves unable to do so because of unanticipated changes in their financial circumstances caused by medical emergencies, job losses, failed businesses, disability, divorce or the death of a “bread-winning” spouse. Any of these circumstances, particularly combined with late payment or over-the-limit fees and high interest rates can result in insurmountable debt.

In addition, credit is more readily available now than in the past, and that access has led many to financial problems. Health care has also become markedly more expensive over the years, and a single accident, illness or injury (or the need for long-term treatment for a chronic condition) can result in tens or hundreds of thousands of dollars in medical expenses.

Q: What alternative courses of action are there to filing bankruptcy?

A: Short of bankruptcy, a debtor may attempt to mediate with creditors or negotiate workout agreements to extend due dates, lower interest rates, partially forgive debt or alter terms of repayment. A debtor could also may execute an “Assignment of Property for the Benefit of Creditors” (known as an “ABC”), wherein the debtor puts assets in the trust of a neutral third party to pay creditors. A business debtor has the option to sell his or her business, negotiating the satisfaction of debt as part of the deal. Options to bankruptcy do exist, but many creditors are unwilling to agree to reasonable term modifications and are not interested in negotiation.

Q: What types of personal bankruptcy are there?

A: Consumers usually file Chapter 7 “liquidation” or Chapter 13 “reorganization”/”repayment” bankruptcies. In practice, most persons considering Chapter 7 only own property exempt from liquidation under the law and most of their debt is cancelled (discharged) without actually losing any of their property. Chapter 7 filers must pass what is known as a “means test” to qualify. Under Chapter 13 bankruptcy, debts are consolidated into one repayment plan that the debtor pays over time (usually from three to five years). At the end of that period, remaining debt is discharged.

Q: Can bankruptcy free me from my student loans?

A: In years past, it was fairly common for people to seek bankruptcy discharge of student loan debts, so they were eventually removed from consideration for the bankruptcy process. Gradually, however, the prohibitions against student loans have lessened a little bit. In some instances, you can include student loans and taxes in a Chapter 13 repayment plan and pay them off over time, saving money in the end. Student loan debts may also be dischargeable in rare instances, if the debtor can prove an “extreme hardship” or “undue hardship” associated with repayment.

Q: Are spousal maintenance/alimony and child support obligations dischargeable in bankruptcy?

A: Domestic support obligations like alimony and child support are not dischargeable, nor does the filing of a bankruptcy petition stay most court proceedings dealing with family law issues. Some other obligations to a spouse or child incurred in a divorce, separation or by court or government order, such as property settlement demands, may or may not be dischargeable, depending on the circumstances.

Q: Can I stop paying my alimony and child support during my bankruptcy?

A: A debtor is required to remain current on all domestic support obligations such as alimony/spousal maintenance and child support throughout the duration of the bankruptcy. If a debtor falls behind on his or her domestic support obligations during bankruptcy, the bankruptcy could be dismissed or converted from a Chapter 13 to a Chapter 7 proceeding. The debtor could also risk being held in contempt of court and incurring interest or fees for failing to pay alimony or child support.

Q: How long can credit bureaus include bankruptcy information on a credit report?

A: Consumer credit reports may reveal Chapter 7 bankruptcy cases for 10 years from filing. Chapter 13 information can be included for seven years from discharge or 10 years from filing if there is no discharge. Account information for debts discharged under either chapter may be included in credit reports for seven years after the accounts go inactive.

Q: Should I consult a lawyer for legal advice about bankruptcy?

A: Absolutely. If you are contemplating bankruptcy or have questions about whether bankruptcy is right for your unique financial situation, you should contact a bankruptcy attorney immediately.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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