Personal bankruptcy is when someone who is unable to pay their debts takes legal action to help them negotiate their way through the situation. Depending upon the chapter filed under, this eliminates most debts and/or reduces and postpones others. The intention of the law is to give people in otherwise inextricable debt a new financial start. Not everyone can file for bankruptcy, in order to do so one must be subjected to a "means test," designed to prove that those filing for bankruptcy are truly unable to pay their debts.
Why Bankruptcy?
People filing for bankruptcy often do so because of unanticipated financial situations such as medical bills, divorces, and job loss. The current economic downturn has seen an increased number of people filing for bankruptcy, as more people are losing their jobs and there is less consumer credit available for loans. According to The New York Times article, "Downturn Drags More Consumers Into Bankruptcy," the filings for personal bankruptcy have increased 34 percent since last October.
Chapters 7 and 13
There are two different options for those who want to file for personal bankruptcy, these are Chapters 7 and 13. Under Chapter 7 a person's possessions such as their car and house may be liquidated to go toward paying off debt. Chapter 13 allows a person to retain some of these assets as he works toward paying off his debt. According to The New York Times article, "Filers who are deemed able to repay a portion of their debts must file for Chapter 13 bankruptcy."
Chapters 7 and 13 Differences
Charles Phalen goes on to describe the differences between Chapter 7 and 13 further in his article "The New Bankruptcy Means Test Explained in Plain English." "When most people think of bankruptcy, they think of Chapter 7, where unsecured debts are normally discharged in full. Bankruptcy of any sort is a difficult ordeal at best, but at least with Chapter 7, a debtor was able to wipe out their debts in full and get a fresh start. Chapter 13 is a different story, since the debtor must pay back a significant portion over a 3-5 year period, with five years being the standard under the new law."
History of Bankruptcy
Bankruptcy has a long history, dating back to the Roman Empire. The word has Latin roots, ruptus and bancus, which mean "broken bench." In the Roman Empire, a tradesperson who could not pay his debts literally had his trading bench broken, and at times could be executed. In many places people were often imprisoned in debtors prison when they could not pay their debts. This became illegal in the United States in 1833.
Bankruptcy in America
American bankruptcy laws are very different from those in the rest of the world. Most other nations do not permit debtors to discharge their debts upon insolvency.
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