The bankruptcy laws are structured to help those facing severe financial circumstances, such as illness or job loss, get a fresh start by reducing or eliminating crushing burdens of debt. Yet, the reality is that many consumers are declaring bankruptcy even if they don't need to - and even if it's not the best route back to financial health, or to protecting assets such as retirement plans.
Inside the Bankruptcy Machine
To understand why bankruptcy isn't a cure-all for financial ills, it's helpful to look first at how the bankruptcy filing process works.
Individuals generally file for bankruptcy under one of two provisions of the bankruptcy laws. A Chapter 7 filing eliminates most debts, but requires debtors (those filing for bankruptcy) to liquidate most of their property, which is sold by a trustee to help pay creditors. Certain property is exempt from this selling process because it is considered legally necessary for the support of debtors and dependents, though federal and state laws vary on what property is exempt. Examples include a percentage of equity in a home, disability and unemployment benefits, and some personal property. Along with exempt property, Chapter 7 debtors can keep the money they earn and property they obtain after filing for bankruptcy. A Chapter 7 bankruptcy can only be filed once every six years.
Chapter 13 bankruptcy requires the establishment of a timely repayment plan. Debts are repaid over a three- to five-year period on a regular schedule, in exchange for the right to keep all property. Any payments agreed to must be at least as much as would have been paid to creditors in a Chapter 7 case and are made under the supervision of a bankruptcy trustee. To qualify for bankruptcy under Chapter 13, debtors must have a steady income stream, and unsecured debts (such as credit cards) of less than $250,000 and secured debts (including mortgages) of less than $750,000. There is no limit on the number and frequency of Chapter 13 filings.
Who Claims Bankruptcy?
On one hand, it's obvious that bankruptcy is one of the few routes available to financial stability. The Washington Post reports that hardships - such as staggering medical bills or a job loss - prompted almost half of all bankruptcy filings in 1999. And, as most bankruptcies are filed under Chapter 7, one could assume that these filers were so crushed by debt that they were desperate enough to part with much of their property in exchange for relief from creditors.
