Close-Up: Bankruptcy

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n.

Bankruptcy: The state of being bankrupt, in which a court judges a person insolvent and their property isadministered for and divided among creditors.

Bankruptcy is a concept that physicians seldomthink about. It conjures up images of havingall of one's personal belongings reduced to thecontents of several shopping bags, or sleepingon a park bench, wrapped in a cardboard box to try tokeep warm. It falls into the "it won't happen to me" category.But in reality, filing for bankruptcy is somethingthat can happen to anyone.

According to figures from the American BankruptcyInstitute, slightly more than 300,000 individuals filedfor bankruptcy in 1980. By 2001, that yearly figure hadmultiplied 5 times to approximately 1.5 million people.Throughout the first three quarters of 2003, more than1.2 million people and businesses filed for bankruptcy.That's more people filing for bankruptcy every 3 monthsthan occurred during the entire year of 1980.

Not a Quick Fix

The CompleteBook of Money

On the surface, bankruptcy would seem like a quickand easy way out of all your financial problems. That'sbecause when you file for bankruptcy, you're petitioningthe court to provide you with legal protection from yourcreditors. As Stephen Pollan points out in (Harper Collins; 2000), bankruptcy willfree you from most of your obligations, but not all ofthem, and not without some serious consequences.

First off, Pollan writes, filing for bankruptcy cancause severe emotional stress for you and your family. Itwill greatly restrict your lifestyle and destroy your creditrating. It will take years to clear that blemish fromyour financial record. A bankruptcy filing will remainon your credit report for at least 10 years.

As an alternative to filing for bankruptcy, Pollan suggeststaking control of your financial life. Contact creditors,rather than waiting for them to come banging onyour door. Talk to supervisors or managers who havethe power to authorize a repayment plan and stress tothem your commitment to keeping up with the plan.More than likely, they'll be glad to help you formalize aplan because the alternative—you filing for bankruptcy—might leave them with nothing, and getting paidlate is better than not getting paid at all.

Chapters of Bankruptcy

If you find that filing for bankruptcy is your onlyrecourse, you should know that there are two primarytypes of personal bankruptcy: Chapter 7 and Chapter13. The well-known Chapter 11 is almost exclusivelyused by businesses.

According to Nolo Law Centers (www.nolo.com/lawcenter), Chapter 7 bankruptcy is also called straightbankruptcy. This bankruptcy cancels most of yourdebts; in exchange, you might have to surrender someof your property. You won't be left completely destitute,but the amount of exemptions varies from stateto state. The entire Chapter 7 bankruptcy processtakes about 4 to 6 months, costs $200 in filing andadministrative fees, and commonly requires only onetrip to the courthouse.

Sound quick and painless? Well, Chapter 7 will notabsolve you of all your financial obligations.According to Pollan, you can still be on the hook forcertain income taxes, unpaid withholding taxes, SocialSecurity taxes, student loans less than 5 years old, andspousal maintenance or child support payments incases of divorce. You're also still responsible for debtsincurred on luxury items purchased within a certainnumber of days of your filing. In other words, youcan't charge an expensive vacation and then simplycome home and file for Chapter 7 protection.

In contrast, Chapter 13 bankruptcy leaves yourassets intact. Think of it as a time-out to restructureyour finances and develop a plan to pay off your creditors.In the interim, you will be protected from yourcreditors, but you will have to present your plan tothe court for approval. As part of the plan, wages canbe deducted from your income to facilitate payments.Repayment plans usually run between 3 and 5 years,at which time the court discharges you from all furtherindebtedness.

If you are thinking about filing for bankruptcy,financial writer Stephen Pollan suggests that youfirst consult with someone you trust. For example,you may wish to consult with a financial planner,credit counselor, or your attorney. They might beable to offer some advice or provide a recommendationfor a reputable, experienced bankruptcy lawyer.

The reason you don't want to go directly to a bankruptcylawyer, Pollan says, is that many of them are alltoo willing to usher you through the bankruptcyprocess. And for some people, it might not be the rightpath to take. It's not that they're unethical, but bankruptcyis their specialty. In other words, that's the waythey're likely to lean.

Instead, Pollan suggests consulting a generalistlawyer whose opinion you trust, and who can examineyour circumstances more objectively. If after consultationyou determine that bankruptcy is the way to go,your generalist lawyer may be able to point you to areputable specialist. It's not that different from a familydoctor referring a patient to a medical specialist.

Pop Quiz

1) The number of people filing for bankruptcy since 1980 has

1. Doubled
2. Tripled
3. Increased fivefold
4. Remained about the same

2) A bankruptcy filing remains on your credit report for at least

1. 10 years
2. 15 years
3. 20 years
4. 25 years

3) Chapter 7 bankruptcy is also known as

1. Personal bankruptcy
2. Straight bankruptcy
3. Crooked bankruptcy
4. Business bankruptcy

4) A second type of personal bankruptcy is called

1. Chapter 11
2. Chapter 13
3. Chapter 15
4. Chapter 17

5) Before filing for bankruptcy, talk with

1. A financial planner
2. A credit counselor
3. Your personal attorney
4. Any of the above

Answers: 1) c; 2) a; 3) b; 4) b; 5) d.