Bankruptcy Filings Rise Nine Percent in 2010

Despite reports of an improving economy, Americans are still overburdened with debt and seeking protection by filing for bankruptcy in record numbers. According to a report by the American Bankruptcy Institute (ABI), 1.53 million Americans filed bankruptcy last year, a nine percent increase over the number of filings in 2009.

While the nine percent increase is not nearly as impressive as the 35 percent jump in bankruptcy filings from 2008 to 2009, the sheer number of 2010 filings shows that economic recovery is slow going for many U.S. households. With high unemployment, sluggish job growth and continued depressed housing markets, many Americans have to rely on their credit cards to live - and the debt quickly mounts.

The one-and-a-half million filings in 2010 is the highest number of filings since the overhaul of the Bankruptcy Code went into effect in 2005. That year a record two million Americans submitted their bankruptcy petitions before the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law.

BAPCPA was supposed to make it more difficult to file for bankruptcy by requiring filers to pass a means test to qualify for Chapter 7 as well as mandating credit counseling and imposing higher filing fees, among other changes. With so many people struggling in the current economy, however, the 2005 changes have not prevented the vast majority of those who need bankruptcy to help them start over financially from qualifying. They have just made the cost of bankruptcy double.

Chapter 7 - Liquidation Bankruptcy

Chapter 7 bankruptcy is also known as liquidation bankruptcy. During a Chapter 7, the bankruptcy court will assign a trustee to collect any non-exempt assets owned by the debtor. These assets are subject to sale or liquidation, to repay some or all of the debtor's creditors.

Most debtors, however, will not lose any personal property in a Chapter 7 filing. The majority of Chapter 7 filers only own exempt property, which cannot be sold during bankruptcy. Examples of exempt property include the family home, the family car, household items and personal use items. Under the Bankruptcy Code, a certain amount in value of these items is considered exempt. For example, in Indiana, homeowners can each exempt up to $17,600 in equity in his/her primary residence.

To qualify for a Chapter 7, debtors must pass a means test. The means test determines whether the debtor has sufficient disposable monthly income to repay some of his or her debts. If the debtor does not pass the means test, then the debtor has the option of filing for a Chapter 13 bankruptcy instead of a Chapter 7.

Most people seeking Chapter 7 protection, however, will qualify. Chapter 7 remains the most common type of consumer bankruptcy, accounting for more than 70 percent of bankruptcy filings in 2010.

Chapter 13 - Wage Earners Bankruptcy

In a Chapter 13 bankruptcy, debtors repay a portion of their debts through a three to five year repayment plan. Since a Chapter 13 involves repaying some of the debt, it is only a good option if the debtor has steady income and can commit to making the plan's payments for the repayment period.

One of the primary advantages of a Chapter 13 bankruptcy is that it allows debtors to keep or get their homes out of foreclosure. Missed mortgage payments can be included as part of the repayment plan, allowing debtors to catch up on back-owed payments and become current on their mortgage.

Once the debtor has created a repayment plan and it has been accepted by the bankruptcy court, then the debtor will begin making regular monthly payments to the appointed trustee. It is important that the debtor makes all of the payments on-time in the repayment plan. Failure to do so can result in the bankruptcy judge dismissing the bankruptcy petition and/or converting the filing to a Chapter 7.

The bankruptcy judge also can dismiss the Chapter 13 petition if the debtor accrues new debt during the repayment period without first obtaining permission from the trustee to do so or if the debtor fails to pay support obligations, like child support, that were imposed after the bankruptcy filing.

The Automatic Stay - Immediate Relief from Creditors

When a debtor files for either a Chapter 7 or Chapter 13 bankruptcy, the court issues an automatic stay. The automatic stay prevents creditors from continuing to engage in any debt collection activities against the debtor while the bankruptcy is pending. This means no more creditor harassment including threatening phone calls and letters, wage garnishments or pending legal actions.

However, in some cases, the automatic stay may be lifted against certain creditors or for certain legal actions. For example, if the bankruptcy petition is filed in the middle of a divorce or child support hearing, the bankruptcy judge may lift the automatic stay with regards to those legal actions.

Debt Discharge

At the end of the bankruptcy process, the bankruptcy judge will discharge any remaining debts against the debtor. In a Chapter 13, the remaining debts only will be discharged if the debtor successfully completes the repayment plan. Once the debts have been discharged, then the creditors cannot try to collect those amounts from the debtor.

Non-dischargeable debts

Unfortunately, not all types of debt can be discharged in bankruptcy. Some examples of non-dischargeable debts include:

Student loans
Unpaid support orders, like child support, alimony
Certain unpaid taxes

Contact a Bankruptcy Attorney