Let’s get very basic. What gives you the right to just stop paying creditors? What do creditors get in return?
An Option—Nothing More or Less
Bankruptcy is a legal option to consider if you are having serious financial problems. It may or may not solve those problems in your particular situation, but it is worth finding out one way or the other. If you have a reason not to file bankruptcy, whatever it is, you should find out whether that reason actually does apply to you, and whether the law provides a way around it. Bankruptcy law can get quite complicated, so there are countless misconceptions and half-truths about it. You owe it to yourself to know the actual truth, so that you will be able to make an informed decision.
A Legal Tool
Once you understand how a bankruptcy would work in your situation, not only would you be able to make an informed financial choice but also a moral one. A moral choice involves a weighing of your different responsibilities—not just to your creditors, but also to your spouse, your family, the broader society, and yourself—including your emotional and physical health. You can’t weigh those responsibilities and decide whether to use the legal tool of bankruptcy until you understand how that tool would apply to you.
Bankruptcy is Almost Always a Series of Options
Most of the time the bankruptcy tool comes to you with some flexibility. This includes not just whether to file under Chapter 7 or Chapter 13 (the primary consumer options), but also how to deal with certain creditors and other considerations in your case. Filing bankruptcy is usually not just a “yes”/”no” decision, but rather a series of options related to your unique personal situation.
It’s the Law
You’ve probably heard that the U.S. Constitution explicitly authorized bankruptcy. (See its Article 1, Section 8, clause 4.) But you may not realize how much that was then consistent with, and since then has helped further shape, our national character. It’s part of an attitude that encourages innovation and personal risk, forgives honest financial failure, and provides a fresh start. It’s a recognition that people who are impossibly burdened by debt will not be as economically productive—much less humanly productive—members of society. Appropriately used, bankruptcy is good for the economy.
How is it appropriately used? In the ways laid out by Congress in the Bankruptcy Code, which among other things describes the two major options—Chapter 7 and 13—and then the choices within those Chapters.
What Do the Creditors Get?
If the Constitution and the federal Bankruptcy Code give you the right to not pay your creditors, what do they get in return?
Bankruptcy law involves a balancing act between your rights and that of your creditors. Describing what they get in every circumstance would require describing most of bankruptcy law, which the next few blogs will do on at least a basic level. But in the meantime, here is a very short summary.
Under Chapter 7 “straight bankruptcy,” most of the time most of your creditors get nothing in return. You get to keep everything you own, as long as it’s all “exempt,” as it is for most people. Rarely, you might need to surrender something to the bankruptcy trustee so that its proceeds can be distributed to your creditors. Debts with collateral are different—you generally either pay the creditor for the right to keep the collateral or instead surrender the collateral and owe nothing. Certain kinds of debts may not be able to be written off (“discharged”)—certain taxes, most student loans, back child/spousal support, and some others.
Under Chapter 13 “adjustment of debts”, sometimes most of your creditors get nothing, but most of the time they get some percentage of what you owe. In return you get more power over debts with collateral and those that would not be discharged under Chapter 7.
Follow the Lead of the Founders, Congress, and the Economy
No question—bankruptcy is a deeply personal choice. So be sure that you learn, up close and personal, exactly how bankruptcy would or would not help you so that you can wisely decide whether or not to walk through the doors the nation’s founders and Congress have opened for you.