Reprinted from Daily Journal

Bankruptcy - What is it, and why is it necessary?
By PAM CLIFTON / Daily Journal Correspondent

Editor's Note: The following is the third in a several-part series focusing on home mortgages, budgets and repairing/maintaining good credit.

Consumer debt is at an all-time high. Even more shocking is that a record number of consumers are filing for bankruptcy. Reasons for this include anything from illness to unemployment to simply overspending. The fact is, bankruptcy can be a very overwhelming thought. No one wants to risk losing any or all of their assets. But at the same time many who are under extreme financial burdens often see no other way out.

The term "bankruptcy" first originated in Italy. When a businessman was no longer able to pay his debts, his "trading bench" would then basically be destroyed. Bankruptcy stems from "Broken bench," also "banca rotta" in Italian. At that time, businessmen who could not repay their debts were treated very harshly, often with severe penalties, from imprisonment (debtors' prison) to even the death penalty. Because of that, the interests of the creditors was valued more highly than that of the debtors.

Early bankruptcy laws in the U.S. were only temporary measures which matched the harsh economic conditions. In other words, when economic conditions improved, the bankruptcy laws were softened. Currently, bankruptcy laws are no longer as flexible and are now more permanent. The Bankruptcy Act of 1898 was actually the first piece of official legislation that extended protection to corporations from creditors; it's also the foundation of the nation's bankruptcy laws today. Since that legislation more than 100 years ago, bankruptcy laws have been both amended and revised to meet today's economic conditions.

Bankruptcy is defined as a legal process governed by both federal rules and procedures which are contained in the Bankruptcy Code and the Bankruptcy Rules. The primary purpose of this law is to provide a debtor with a "new beginning" through which some debts can be restructured, discharged or paid. In addition, bankruptcy provides a way for creditors - the person to whom the money, goods or services is owed -- to be treated fairly and equitably, while the debtor -- the person who owes money, goods or services -- is treated the same way.

There are several different chapters of bankruptcy. The most common are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 bankruptcy is primarily referred to as liquidation. An appointed trustee is responsible for liquifying the debtor's assets and distributing those to creditors.

For Chapter 13 bankruptcy, the goal is to rehabilitate the debtor - with the protection of the government -- to allow him or her to use future earnings so that he or she can pay creditors.

Brad Cooper, owner of Cooper Financial Solutions of Park Hills and who specializes in helping families with credit issues, including bankruptcies and foreclosures, quotes the June 1 issue of the Wall Street Journal with a staggering statistic: "Chapter 7 bankruptcy filings are up almost 25 percent just this year." Chapter 13 bankruptcy filings are up about 14 percent.

A new bill on bankruptcy goes into effect in less than four months. That change sets up a new test for measuring a debtor's ability to pay.

"Those with insufficient assets or income could still file a Chapter 7 bankruptcy," says Cooper, "which, if approved by a judge, erases debts entirely after certain assets are forfeited." However, those above the state's median income level who could pay at least $6,000 over the span of five years (which equals about $100 a month) would be forced into Chapter 13 bankruptcy. At that point a judge would then order a repayment plan. Cooper points out, as noted in the article, that critics say it's unfair because many people who do file for bankruptcy have already lost their jobs or are about to lose them.

Keeping with the current law, a bankruptcy judge decides under which bankruptcy chapter a person falls, which determines if they repay some or all of their debt. Beginning Oct. 17 of the current year, individuals will have a much more difficult time filing a Chapter 7 bankruptcy because the new bankruptcy laws go into effect. The Wall Street Journal article did not stress that the bankruptcy statistics have risen because the law will soon be changing. Instead, it emphasized that these statistics have increased because of other economic reasons, including credit cards,layoffs, medical bills and other reasons.

With the new legislation, it will now be more difficult for consumers to file a Chapter 7 bankruptcy, which is also known as complete dismissal.

Instead, they will be forced to file Chapter 13 bankruptcy, also called reorganization (the individual follows a repayment plan). Fortunately, Midwest residents won't be affected as much as others by the new bankruptcy law. "Because the new bankruptcy law is based on income," Cooper points out, "families in the Midwest won't be affected as much, as compared to families on the west and east coasts." As an example, a family who earns an average of $60,000 annually might be considered in the poverty level nationwide, as compared to those who earn considerably more on the east and west coasts.

In past years, bankruptcy has focused on the creditors without much compassion for debtors. Today, bankruptcy benefits both the creditor and debtor; the creditor gets his or her investment while the debtor can still comfortably maintain his or her monthly obligations. The focus has now shifted from the creditor to the debtor to help her or him in reorganization and rehabilitation.

A bankruptcy case actually begins when an individual pays a filing fee and files a petition with the Bankruptcy Court. Financial information, including a list of all assets and debts, must be provided at that time.

In addition, all debtors must certify this information under penalty of perjury.

Once the bankruptcy petition has been filed, an "automatic stay" goes into effect immediately. The "automatic stay" stops most debt collection efforts against the debtor, unless the bankruptcy court grants the creditor permission to continue pursuit of these efforts. The bankruptcy court, or sometimes a bankruptcy trustee, oversees the activities of a debtor until his or her case is concluded.

What exactly is the purpose of bankruptcy? Often people view bankruptcy as a bad thing. But the U.S. Supreme Court, in many of its opinions, has described bankruptcy as a "new opportunity in life, unhampered by the pressure and discouragement of pre-existing debt."

In addition, bankruptcy gives risk takers and business entrepreneurs a crutch to take a chance in today's economic market. They add valuable skills to the U.S. economy, and bankruptcy gives added protection to them (debtors) and their creditors.

For more information on bankruptcy, contact Cooper Financial Solutions at 573-431-5286.

Consumers can also visit the following Web sites for helpful bankruptcy and other budget-related information:

• www.missourimortgageexperts.com
• www.bankruptcy-courts.net
• http://cgi.money.cnn.com/tools/budget101/budget_101.jsp (CNN onlinebudgeting help)

Not sure if bankruptcy is for you? Our next article, the fourth in this series will focus on home mortgages, budgets and repairing/maintaining good credit, in the Daily Journal's B section for information on helping you decide if bankruptcy is the best financial option for you and your family.