Bankruptcy Fortress

In 2008, over 45,000 businesses and 1 million consumers filed for bankruptcy.   Experts agree that year 2009 will see an even bigger rush to wipe out debt. 

Bankruptcy is a powerful and flexible tool for ordinary Americans who are facing excessive debt. 

The government is bailing out in cash big banks and corporations.  For ordinary people, bankruptcy is an individual financial bailout.  In bankruptcy,

1. Debts will be completely forgiven or significantly reduced (chapter 7). 
   
2. Alternatively, a fraction of the debts can be paid off over the course of five years (chapter 13). 
3. In addition, bankruptcy can stop foreclosure, repossession or creditor harassment. 

Bankruptcy stabilizes your financial life and allows you to start saving for a rainy day.  A 2009 study from the Federal Reserve Bank of Boston (available here) showed that

• Individuals who file for bankruptcy get credit very quickly after filing. 
  
• Filers with bad credit immediately become more desirable to creditors and start receiving more credit offers than before filing.

Bankruptcy is such a dramatic tool that, sometimes, bankruptcy lawyers can even

1. return garnished wages,
2. get back a repossessed car and refinance it on better terms, and
3. wipe out (strip) a second mortgage.

Consumers can choose between two different types of bankruptcy:

• Chapter 7 is a liquidation. When this option is available, most debts will be discharged and the consumer walks away with his exempt property.  The law of exemptions varies from state to state.  So the exempt property that a Chapter 7 debtor keeps could be modest or could be a fortune, depending on the state of residence.  In any case, when bankruptcy is properly planned, all property is exempt and none of it goes to creditors.
• Chapter 13 is a payment plan where the debtor with regular income pays off a portion of his debts over 3 to 5 years.  Debtors, who are fortunate to have so much property that exemptions are simply not enough, can still keep their non-exempt property by paying to the creditors the value of the non-exempt property over the 3-5 year course of the Chapter 13 plan.

THOMAS OLIVER, "This will be the year of bankruptcy" The Atlanta Journal-Constitution, February 18, 2009

Bob Lawless, "Projected Bankruptcy Filings in 2009" - Credit Slips Blog, December 18, 2008