Personal Bankruptcies jumped 14.3 percent in the year ending in June, compared with a slight decline a year ago. As credit continues to tighten and layoffs rise, more Americans will be dragging their failed finances to court.
But when they do, they'll find themselves in the hands of a new and more generous bankruptcy law. It performs the wire-walking feat of helping true bankrupts get the fresh start often denied them under the old law, while encouraging salvageable debtors to try something other than stright bankruptcy. e
The preferred new route is Chapter 13 of the Bankruptcy Code, long known as the wage-earner plan. Under this arrangement, a debtor doesn't formally declare himself broke. Instead, he goes to court and negotiates a stretched-out repayment schedule to cover his debts.
The old Chapter 13 was little-used in many parts of the country, and for good reason. Its mechanics made it hard to negotiate anything less than full repayment of bills over three years.
The resulting monthly payments proved so high, in many cases, that families still wound up in court. If their repayment plan had been drawn for less than 100 cents on the dollar, however, bankruptcy was normally not allowed. So the debtor was really stuck. Meanwhile, co-signers could be sued immediately for the full amount.
But the new Chapter 13 is a different animal. Creditors without collateral, such as grantors of charge accounts and bank cards, can be forced to accept repayment plans for less than 100 cents on the dollar. Creditors with collateral, like a store that sells a TV set or refrigerator on the installment plan, may collect no more than the value of the specific property, which could be less than the total debt.
Repayment plans, in short, may now be drawn for much less than 100 cents on the dollar, without affecting a debtor's right to go bankrupt if he finds that he still can't make ends meet. Co-signers, under the new Chapter 13, are liable only for that portion of the debt not covered under the repayment plan. A non-earning co-signer, such as a housewife, may file for protection with her husband.
Before the new law went into effect on Oct. 1, straight bankruptcy was used fi ve times more often than a wage-earner plan. Now, bankruptcy lawyers expect those numbers to reverse.
Barry Barash, a bankruptcy lawyer in Galesburg, Ill., says that a recent client was $1,800 behind on his home mortgage payment. Under a wage-earner plan, he's now paying a small amount of that debt every month. "This way," Barash says, "he can keep the house and live in it; with straight bankruptcy, he would probably have had to sell it to pay off creditors."
Under the new wage-earner plan, you're allowed to discharge federal student loans, debts incurred as a result of a fraudulent financial statement, and taxes more than three years old, according to Los Angeles bankruptcy specialist Kenneth N. Klee, who helped write the new law. Under straignt bankruptcy, all these debts would have to be paid in full.
Even in a wage-earner plan, however, you still have to pay back alimony, child support and taxes owed for the past three years. Debts now dischargeable under Chapter 13, but which Congress may return to the mandatory-payment category, include certain fines, court judgements, the cost of any malicious injuries you inflict on others and debts incurred as a result of larceny.
In any straight bankruptcy, certain property is exempt from seizure. The new federal law creates minimum exemptions -- for example, an equity value of $7,500 for homeowners, its equivalent for renters, and a car worth $1,200. In states with low limits, debtors may opt for the higher federal ceilings unless the state votes to disallow it (four have -- Florida, Louisiana, Ohio and Virginia). Other states have different or higher exemptions, which remain in force.
To sort out these options, you'll definitely need a bankruptcy lawyer. Don't try to do it yourself.
Finally, Congress, in most instances, has made it illegal to bully or sweet-talk a bankrupt into resuming full and irrevocable responsibility for a past debt. Now, if he signs a contract renewing the debt, it can be declared void.