|
Bankruptcy bills would make debtors
pay up
By Alina Diaz • Bankrate.com
Two bankruptcy reform bills are being weighed
in both the House of Representatives and the U.S. Senate. If they
pass, debtors would be left owing more after a bankruptcy than they
now are required to pay.
Sen. Charles Grassley (R-Iowa), chair of the
Senate Judiciary Administrative Oversight and the Courts Subcommittee,
introduced the Bankruptcy Reform Act of 1999 (S. 625), designed
to address the increasing number of bankruptcy cases. The bill contains
provisions that would keep those filing for bankruptcy from avoiding
child support obligations.
The House is marking up its version of the bankruptcy
legislation: H.R. 833, sponsored by Rep. George Gekas (R-Pa.), chair
of the Commercial and Administrative Law Subcommittee of the House
Judiciary Committee.
"The bill makes the rights of women and
children a much greater priority in the bankruptcy system, protecting
alimony and child support payments. Under current bankruptcy law,
child support is the seventh priority. This bill moves it directly
to the top," Gekas says.
The current Bankruptcy Code treats all debtors
equally. The Bankruptcy Reform Act would ensure that high-income
filers who could repay some of what they owe are required to do
so. It accomplishes this through a need-based system that takes
a debtor's income, expenses, obligations and any special circumstances
into account when determining whether he or she has the capacity
to repay a portion of their debts.
A
little learning
The act also includes educational provisions to help make debtors
aware of what their options are before they file for bankruptcy,
including alternatives to bankruptcy such as credit counseling.
It also sets up a pilot program of financial management training
for debtors in the bankruptcy system, to help educate filers so
they can avoid repeating their mistakes.
In addition, it imposes new restrictions and
responsibilities upon creditors. For example, the bill requires
creditors to disclose more about the effect of paying only the minimum
payment, limits the ability of a creditor to terminate an account
just because a consumer pays his or her bill in full each month
and establishes new creditor penalties designed to encourage good-faith
pre-bankruptcy settlements with debtors.
While bankruptcy may be a life vest for most
people drowning in debt, choosing to file for it is never an easy
decision and -- for some financially distressed debtors -- bankruptcy
may not always be the best option.
Several events can cause individuals to lose
control of their financial situation. Divorce, job loss, lawsuits,
foreclosures or credit card debt can drive a person over the financial
edge.
According to the bankruptcy information Web
site e-bankruptcy.com, "Generally, filing bankruptcy allows
people who are having financial difficulties to wipe out their debts.
In most cases, people filing bankruptcy can keep all of their property.
Thus, bankruptcy helps people wipe out their debts, keep their property
and get a fresh start."
"Bankruptcy was designed to help consumers
eliminate or reduce excessive debt," says Kenneth Foreman,
a bankruptcy lawyer for the Bankruptcy Solution, based in Miami.
"Most people filing for bankruptcy have accumulated a huge
credit card debt and, in some cases, are trying to prevent a foreclosure
on their home."
Ten years of bad
credit
Although bankruptcy can wipe out all unsecured debts through an
order of the court called a discharge, bankruptcy information remains
on a credit report for 10 years. Any negative information that appears
on a credit report may prevent an individual from buying a home,
a car or obtaining a credit card.
Bankruptcy serves two main purposes: it gives
creditors a fair share of the money that the debtors can afford
to pay back and it gives debtors a fresh start.
There are two ways in which bankruptcy can provide
for payments to creditors and a discharge for debtors -- Chapter
7 and Chapter 13.
In a Chapter 7 bankruptcy, known as the liquidation
chapter, debtors give up certain property when they file for bankruptcy.
A trustee, appointed by the court, sells the property and uses the
proceeds to pay the creditors. A trustee is usually a lawyer or
accountant who specializes in bankruptcy cases. The debtor then
receives a discharge shortly after the case is filed.
Debtors are allowed to keep any money earned
after filing for bankruptcy, as well as most other property obtained
after the filing. Under this chapter, all unsecured debts are wiped
out. These debts include credit card bills, medical and legal fees,
utility bills, deficiency balances (the difference between the amount
owed and that value of the property), loans from friends and some
student loans.
There are some debts that cannot be discharged
through the bankruptcy process. These debts, known as non-dischargeable
debts, include alimony, child support, some student loans, certain
federal, state and local taxes, debts from fraud, larceny, theft,
fines and penalties for items worth over $1,000.
Chapter 13 is designed for individuals with
regular income who want to pay their debts but are currently unable
to do so. The purpose of this chapter is to help individuals, under
court supervision and protection, to propose and carry out a repayment
plan under which creditors are paid over an extended period.
Under this chapter, debtors are permitted to repay creditors in
full or in part, in installments of a three-year period.
Creditors:
Stay away
During this time, creditors are prohibited from starting or continuing
their efforts to collect the debt. The debtor sends one payment
in each month to a court trustee, who pays each debt. While under
the plan, the individual is protected by the court from collection
calls or garnishment of wages. On unsecured debts, no interest is
paid, unlike bank cards, where more than half of the monthly payment
usually goes toward interest.
Anyone can file for bankruptcy with a federal
bankruptcy court. But the bankruptcy judge makes the final decision
whether a debt will be discharged. "Judges automatically approve
a bankruptcy petition," says Martin Ufford, a bankruptcy lawyer
with the firm Redmond & Nazaar in Wichita, Kan. However, if
one creditor disputes the case, citing the debtor's ability to pay
despite filing under a Chapter 7 liquidation, the judge may decide
to change the bankruptcy chapter from 7 to 13, which would hold
the debtor responsible for paying off the debt.
While anyone can file for bankruptcy on their
own, a bankruptcy lawyer could offer invaluable advice and recommendations
when filing. A lawyer can charge anywhere from $500 to $1,500 to
help file a bankruptcy petition or represent an individual at the
hearing.
First, the debtor or the debtor's attorney prepares
a petition, together with documents of what the debtor owns and
how much he owns, along with a complete statement of his financial
affairs.
These documents are then filed with the Bankruptcy
Court and the court will notify the creditors of the filing. Both
the debtor and the creditors will be required to attend a hearing,
at which the debtor will be required to answer questions about his
assets and financial affairs. The court will appoint a trustee,
whose duties will be to examine any claims filed by creditors. The
trustee will determine whether they are proper, and will divide
the proceeds of any nonexempt property among the creditors.
Some property may be exempt from the claims
of creditors -- working tools, household furnishings, radios, television
sets, insurance policies, musical instruments, some bank, savings
and loan, or credit union accounts, automobiles and homes. About
three months after the meeting with creditors, the court will hold
another hearing in Chapter 7 liquidation cases, which the debtor
must attend. At the hearing, the bankruptcy judge will inform the
debtor about the debts discharged.
At the end of the bankruptcy case, the court
enters an order closing the case, and a copy of this order is sent
to the debtor. Unless the trustee has assets to distribute to creditors,
closing the case of a Chapter 7 filing takes place fairly quickly.
In Chapter 13, the case will not be closed until after the debtor
finishes making payments under the plan.
Backed into a
corner
For Edilia Ferrer, a resident of West Miami, Fla., the decision
to file for bankruptcy was difficult. Between mortgage payments,
credit cards bills, utilities and other expenses, Ferrer had accumulated
a debt of $25,000. After Ferrer's annual income was drastically
reduced from $27,000 to $20,000, she had no other choice but to
file for bankruptcy.
"Before making the decision, my income
was cut due to a reduction in working hours, and I couldn't afford
paying the minimum due on the credit card bills," says Ferrer,
who filed for bankruptcy in 1997. "My biggest concern was keeping
my home." After filing under Chapter 7, Ferrer kept her home,
her car and one credit card, which she paid off before filing.
Most experts advise against filing for bankruptcy
and recommend finding alternative ways to pay off debt. Dawn Sims-Muñoz,
a counselor with the Consumer Credit Counseling Service in Phoenix,
Ariz., says most consumers should try paying off their debts through
a repayment program before choosing bankruptcy. She adds that these
types of programs will teach the consumer the need to reduce expenses
and save money.
-- Posted: March 26, 1999
|
