The Basics of Bankruptcy
Personal bankruptcy is generally considered a last resort for debt management because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. For many military families, bankruptcy is an enticing solution to their financial hardships because the stress of debt weighs heavy on their shoulders. Bankruptcy is not recommended unless efforts to recover from massive debt and loans have been unsuccessful, and even then it is avoided at all costs.
Still, it is a legal procedure that offers a fresh start for people who can't satisfy their debts. People who follow the bankruptcy rules receive a discharge — a court order that says they don't have to repay certain debts.
The consequences of bankruptcy are significant and require careful consideration. Other factors to think about: Effective October 2005, Congress made sweeping changes to the bankruptcy laws. The net effect of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7. Chapter 13 allows you, if you have a steady income, to keep property, such as a mortgaged house or car, that you might otherwise lose. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than surrender any property. After you have made all the payments under the plan, you receive a discharge of your debts.
Chapter 7, known as straight bankruptcy, involves the sale of all assets that are not exempt. Exempt property may include cars, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the time period during which you can receive a discharge through Chapter 7. You now must wait eight years after receiving a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.
Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities. Both also provide exemptions that allow you to keep certain assets, although exemption amounts vary by state. Personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. Also, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it. Using military pay charts or calculators is a good way to evaluate the amount of money you'll have to put forward into a payment plan under Chapter 13.
Another major change to the bankruptcy laws involves certain hurdles that you must clear before even filing for bankruptcy, no matter what the chapter. You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved organizations at usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the U.S. Trustee Program at usdoj.gov/ust.
For more information, see Before You File for Personal Bankruptcy: Information About Credit Counseling and Debtor Education, Knee Deep in Debt, and Fiscal Fitness: Choosing a Credit Counselor at ftc.gov/credit.
Ads Promising Debt Relief May Really Be Offering Bankruptcy
While the ads pitch the promise of debt relief, they rarely say relief may be spelled b-a-n-k-r-u-p-t-c-y. And although bankruptcy is one option to deal with financial problems, it's generally considered the option of last resort. The reason: it has a long-term negative impact on your creditworthiness. A bankruptcy stays on your credit report for 10 years, and can hinder your ability to get credit, a job, insurance, or even a place to live. What's more, it can cost you attorneys' fees.
MilitaryConnection.com recognizes the financial struggles military families face on a daily basis. Because of the extra pressure of having a single spouse raising children, these families often face hardships and financial burdens not felt by other families. As such, it can be easy to think of bankruptcy as an only hope to getting out of debt, but there are other options. Many bankruptcies are caused or sparked by bad loans made by fraudulent lenders or lenders who do not have their clients' best interests in mind.
That is why MilitaryConnection.com has teamed up with Pioneer Lending to help you find military loans that are affordable, reliable and won't leave you inching toward bankruptcy. Check out all the financial information our site has to offer on credit and finances. Our military pay calculators and pay charts help families like you set boundaries on spending and budgets to help keep your finances in check.
We also provide hundreds of excellent job opportunities for military service members and veterans alike. Our job board is updated daily with new and outstanding employment opportunities for every skill level. If going back to school is an interest, check out our pages on the Post-9/11 GI Bill, which helps cover the cost of tuition and other school fees. There is something for everyone on our site, which is why we are known as the “Go-To” site for everything military. When the next tour is back home, it's on MilitaryConnection.com, your connection to everything military and veteran.