What Is Bankruptcy And How Does It Work
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Filing for Bankruptcy is usually the last option people resort to when theyve gone through a difficult financial situation. People often think that bankruptcy occurs due to a persons financial irresponsibility or misuse of extended credit. But thats not always the case. Often people have questions regarding affordability, which we will cover in this article.
People file for bankruptcy for numerous reasons. If youre part of the reasons below and consider bankruptcy, there are several factors to consider.
We advise that you dont take bankruptcy lightly as it comes with long-term consequences.
Who Can File A Plan
The debtor has a 120-day period during which it has an exclusive right to file a plan. 11 U.S.C. § 1121. This exclusivity period may be extended or reduced by the court. But in no event may the exclusivity period, including all extensions, be longer than 18 months. 11 U.S.C. § 1121. After the exclusivity period has expired, a creditor or the case trustee may file a competing plan. The U.S. trustee may not file a plan. 11 U.S.C. § 307.
A chapter 11 case may continue for many years unless the court, the U.S. trustee, the committee, or another party in interest acts to ensure the case’s timely resolution. The creditors’ right to file a competing plan provides incentive for the debtor to file a plan within the exclusivity period and acts as a check on excessive delay in the case.
Only the debtor may file a plan in a subchapter V case. 11 U.S.C. § 1189.
Emergency Savings Can Help
A big reason so many people wind up in debt over medical issues is that they don’t have adequate savings to cover an unexpected cost. According to a recent GoBankingRates survey, 69% of Americans have less than $1,000 in savings, while 34% have no money in the bank whatsoever. But there’s a reason we’re all advised to sock away enough savings to cover three to six months’ worth of living expenses. Even those of us with insurance are vulnerable in the face of a costly injury or illness, and without ample savings, collectively, we’re taking a pretty big risk.
That said, there are things you can do to ramp up your savings, which can help you avoid medical debt that might ultimately result in bankruptcy. For starters, create a budget so you can accurately track your spending and identify ways to cut corners. Next, reduce your spending for all categories that aren’t essential living expenses. These include leisure, restaurant meals, and even cable .
If that doesn’t do the trick, then you’ll need to consider more significant changes, such as downsizing your living space, unloading a vehicle, or working a side job to generate extra income. The key is to save up enough money so you’re protected at all times.
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Poor Leadership The Main Reason For Contractor Bankruptcies Study Says
Poor strategic leadership is the most important cause of large contractor bankruptcies according to an in-depth study by FMI Corporation.
Poor strategic leadership is the most important cause of large contractor bankruptcies according to an in-depth study by FMI Corporation.
The construction industry is a complicated business that has witnessed smart leaders making what appear to be the same fatal mistakes others have made before them. Every year thousands of contractors face bankruptcy and business failure.
At the end of the day, learning how to lead and manage effectively is the key component that gets firms consistently into trouble, said Ron Magnus, managing director with FMI Corporation. Researchers had to find a way to quantify this in a way that makes sense to construction leaders.
FMI Corporation has produced a study that seeks to understand why seemingly successful contractors experience financial distress.
Overall, our research isolated about 200 potential factors that can lead to contractor failure, said Hugh Rice and Arthur Heimbach, who are the authors of the study entitled Why Contractors Fail. In digging behind these factors, we realized that no single factor would usually signal the impending doom of a construction firm. We found that failing companies usually exhibited a combination of factors that interacted, causing company performance to spiral toward inevitable bankruptcy.
When To Stop Digging A Hole You Can’t Escape
Most of us feel we have a moral obligation to pay what we owe if we can. But typically that ship has sailed by the time people realize they need to consider bankruptcy. They can continue trying to chip away at debts they may never be able to repay, prolonging the damage to their credit scores and diverting money they could use to support themselves in retirement. Or they can recognize an impossible situation, deal with it and move on.
If you can pay your bills, obviously you should. If youre struggling, check out your options for debt relief. But bankruptcy may be the best option if your consumer debt the kinds listed above that can be erased equals more than half your income, or if it would take you five or more years to pay off that debt even with extreme austerity measures.
Heres what you need to know:
You need a bankruptcy attorney: Its easy to make a mistake in the complicated paperwork, and an error could cause your case to be dismissed. If that happens, you end up with no relief but still have credit scores tanked by the bankruptcy filing.
Dont wait too long: Theres a misconception that people file bankruptcy at the drop of a hat or when they still have other options. The reality for most is quite different. Some drain assets, such as their retirement accounts, that could have been protected from creditors in bankruptcy. People throw good money after bad until they have no money left to seek relief.
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You’ll Never Get A Loan Again
Though a Chapter 7 bankruptcy filing will remain on your credit report for 10 years, that doesn’t mean you’ll automatically be denied a loan every time you apply during that period. According to a study by the Federal Reserve, 90% of people are granted some form of credit within 18 months of declaring bankruptcy. If you take steps to rebuild your credit, you may get approved for a credit card, auto loan, or even a mortgage sooner than you think. There is a catch, though, and it’s that you’ll probably wind up with a much higher interest rate than someone with a stronger credit history. For this reason, it’s best to keep your borrowing to a minimum in the years following a bankruptcy filing.
States With High Numbers Of Bankruptcies
The number of annual bankruptcies varies widely by state. This is in part because bankruptcy policies are different in each state and because some states are more populous than others.
Additionally, studies have found that bankruptcy occurs more often in states with more lenient wage-garnishment laws.
The state with the most bankruptcies in 2011 was California, with more than 240,000. This accounted for 17 percent of all bankruptcies nationwide. At the other end of the spectrum, Alaska had fewer than 1,000 bankruptcies in the same year.
The five states with the most bankruptcy petitions in 2011 accounted for a disproportionate 38 percent of the years filings nationwide.
These states and the number of bankruptcies declared in 2011 are as follows:
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Top 7 Reasons People Declare Bankruptcy
Last year 750,489 individuals filed for bankruptcy. This is a number that has thankfully been going down year after year as the Great Recession becomes an increasingly distant yet still very painful memory for so many people. But it does beg the question what are the main reasons that lead people to declare bankruptcy? Its not an easy decision to make because it does impact your credit history and score for years afterwards. For many, it is only done as an absolute, final resort when theyve hit rock-bottom, which is never a good place to be. But knowing what it is that forces people to file bankruptcy can help anyone be more vigilant and hopefully avoid it themselves. Here are the top 7 reasons people declare bankruptcy:
Years Of Bankruptcy: Why More Americans Than Ever Are Filing
Personal bankruptcies in the United States have had a dynamic history over the past 100 years. Bankruptcy filings in the first half of the 20th century averaged 0.15 per 1,000 people and grew at an average annual rate of 2.4 percent. Bankruptcies began to increase during the 1960s and have grown dramatically since 1980. Between 1980 and 2004, bankruptcies grew at an annual average rate of 7.6 percent a year. As of 2004, the filing rate was 5.3 per 1,000 people, more than four times the 1980 rate and nearly 80 times the 1920 rate.
These statistics, however, disguise the fact that personal bankruptcy filings are not equal across the country. For example, at the state level, Tennessee had the highest rate of personal bankruptcy filings in the nation in 2004, with more than 10 filings per 1,000 people whereas Massachusetts ranked last with 2.8 filings per 1,000 people. States in the Eighth Federal Reserve District had an average filing rate of 7.7 per 1,000 people in 2004, which is greater than the U.S. average, but the growth in bankruptcy filings in Eighth District states between 1980 and 2004 averaged 7.2 percent a year, slightly below the U.S. average growth of 7.6 percent a year.
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Impact On Your Credit
Some of the consequences of filing Chapter 13 are identical to Chapter 7. Your credit scores will take a huge hit in a Chapter 13 bankruptcy. But with Chapter 13, the hit to your credit isnt quite as long-lasting as Chapter 7 it stays on your credit reports for only seven years, instead of 10.
Does medical debt affect credit differently than other debt?
Yes and no. Unpaid medical bills cant be added to your credit reports until theyre 180 days overdue. That extended grace period gives your health insurance provider time to pay your claim or for you to resolve billing disputes.
But just like any other debt, unpaid medical debt stays on credit reports for up to seven years. The only difference is that some credit-scoring models penalize you less for medical debt than for other unpaid bills.
Impact On Your Healthcare Services
Chapter 7 bankruptcy can also affect your relationship with your doctor or make it more difficult to get medical treatment. Legally speaking, hospital emergency rooms are required by law to treat patients regardless of their ability to pay. But you could be denied care at a doctors office due to unpaid bills. Some people elect to pay medical debt even after filing bankruptcy to maintain a relationship with their doctors.
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Reason #5 Excessive Credit Card Debt
Most people have some amount of credit card debt. Credit standards before the Great Recession had become very loose, which meant it was easy to get multiple credit cards with surprisingly high lines of available credit. Yes, some people are just not good about using credit. They rack up of a ton of credit card debt without thinking of the consequences until its too late. For others, however, the accumulation of credit card debt was a way of dealing with one of the other items on this list losing a job, having unexpected medical expenses, going through a divorce, and so on. They were able to make ends meet for a time by playing the credit card game, but its not a strategy that can be sustained for long.
The good news is that unsecured credit card debt is among the easiest to reduce or entirely eliminate through the bankruptcy process. Filing for bankruptcy in these cases is often the best way to get your financial life back on track and heading in a better direction. Its also worth noting that a lot of people try to avoid filing bankruptcy by getting into some kind of debt consolidation plan, of which there are no shortage available. But those plans often end up failing and only delaying the inevitable. If one of the root causes of your financial situation is poor budgeting and the inability to control spending, then a debt consolidation plan simply isnt going to work over the long haul.
Is Health Care The Top Reason For Bankruptcies As A Florida Gop Leader Said
Health care is a top reason that Americans are saddled with debt, said Florida House Speaker José Oliva, R-Miami Lakes.
“The two issues that Floridians and Americans are most controlled by nowadays financially are their health care, No. 1 reason for bankruptcy, and student loans, No. 1 debt for young people,” Oliva told reporters during the Associated Presss legislative day Jan. 30.
Oliva stated that the only way to curb rising health care costs is to allow more competition in the free market. The Republican-led Legislature has rejected Medicaid expansion, which is a part of the Affordable Care Act.
We found that it isnt so simple to determine if health care is the top reason for Americans to declare bankruptcy.
Its tough to tease out the single-most factor in bankruptcies, because people can find themselves in debt for multiple reasons at once. But medical bills and illnesses can play a role in bankruptcy, including when people cant work as a result of their health.
There are a few key studies about the extent to which medical bills and illnesses factor into bankruptcy. Olivas spokesman also cited studies about the financial burden of medical debt, but we will focus on the research specifically about bankruptcies.
Medical bankruptcy was a frequent Democratic talking point around the discussion of the Affordable Care Act.
Himmelstein and Warren pushed back, noting that an industry group supported the research by Dranove and Millenson.
Featured Fact-check
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Reason #7 Student Loan Debt
There is more than $1.53 trillion in student debt floating around out there. Its an ongoing challenge faced by one out of every four Americans. Like alimony and child support, filing for bankruptcy will not eliminate or reduce your student loan debt except in very rare cases of extreme hardship. But the constant presence of that large debt can be what leads many people to file bankruptcy so they can address their other debt concerns even though theyll still have to make good on those student loans.
At Day One Credit we are experts at finding the best possible bankruptcy car loans in order to help our customers purchase high-quality used cars. We are not lawyers, we do not give legal advice, and nothing we say should be taken as legal advice. Your first step in anything related to bankruptcy should always be seeking the advice and counsel of a qualified bankruptcy attorney.
Alternatives To Chapter 7
Debtors should be aware that there are several alternatives to chapter 7 relief. For example, debtors who are engaged in business, including corporations, partnerships, and sole proprietorships, may prefer to remain in business and avoid liquidation. Such debtors should consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of the Bankruptcy Code.
In addition, individual debtors who have regular income may seek an adjustment of debts under chapter 13 of the Bankruptcy Code. A particular advantage of chapter 13 is that it provides individual debtors with an opportunity to save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan. Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of chapter 7. 11 U.S.C. § 707.
Debtors should also be aware that out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing.
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Negotiate With The Hospital
If youre unable to cover a medical bill, try calling your hospital or doctors office right away. Working with providers directly could open up new possibilities, like an interest-free repayment plan, for example. Thats a better option than many alternatives, like charging the bill to a credit card that accrues interest.
Unlike some other kinds of creditors, hospitals may be willing to negotiate the amount you owe, particularly if youre uninsured. Your hospital may also offer financial assistance, which is sometimes called charity care.
Reason #3 Loss Or Reduction Of Employment
People who are just managing to get by with their debts based on their current job income can find themselves turning to bankruptcy if they lose their job. The phrase one paycheck away from bankruptcy rings true for all too many people. With the sudden reduction in their income from being laid off or let go, often with little in the way of emergency savings, declaring bankruptcy becomes the only way to keep creditors at bay and reduce or eliminate their worst debts.
As you might expect, the rise in unemployment from the Great Recession caused a huge spike in bankruptcy filings, with 1.53 million individuals filing bankruptcy in 2010. That was the peak, and that number has come down by half since then. But plenty of people are still at risk in spite of the longest post-recession economic recovery in history. After all, its only a matter of when, not if the next recession occurs.
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