According to the Admini-strative Office of the U.S. Bank-ruptcy Courts, filings were up 32 percent in 2008, and have been on a steady incline since then. The bankruptcy concept has been around since the days of Genghis Khan, and serves now to help debtors more than punish them. Yet what is making bankruptcy more and more prevalent in this day and age?
Since 1965, Chattanooga native W. Lloyd Stanley, Jr. has been serving the community as a lawyer and civic leader in practicing bankruptcy, personal injury and wrongful death, workers compensation, probate and estate administration, real estate and estate planning. Stanley began as an assistant U.S. attorney before going into private practice, and represented the IRS bankruptcy court several times. In making the transition to private practice, his work evolved to include bankruptcy.
Stanley says these days it is the same factors as it ever was that lead to bankruptcy. Reduced income from job loss, decreased working hours, reduced number of family breadwinners, and divorce are common triggers, he says.
“Divorce and bankruptcy go hand in hand,” Stanley says. “Debt problems can lead to divorce and divorce can lead to debt problems. It’s not at all uncommon to find people who are getting divorces are filling for bankruptcy right before or after.”
The reason this is the case is because after divorce, people still have the same amount of income but now have to support two households, whether it be in twice the rent and house payments or child support coming into play.
Stanley says illness and injury are also factors in bankruptcy, and tend to overlap with other factors such as if someone has an injury that keeps them out of work for a period of time and thereby reduces their income and perhaps puts their job at risk.
Possibly the most common cause of bankruptcy is overspending, which is also triggered by these other things and brings out the problem of not having enough money which leads to living beyond one’s means, he says.
When is it time
to consider bankruptcy?
Stanley says two things drive people into the office of a bankruptcy attorney or into bankruptcy court more than anything else: threat of foreclosure and repossession of an automobile.
“They need an automobile to get to and from work; if they lose that, they can lose their job,” he says. “Sometimes, it’s the actuality of it once the car has been repossessed, and you hope you can file Chapter 13 and get the vehicle back if it has not already been sold. On foreclosures they can wait too late, and after the house is sold, you can’t get it back.”
When a client comes into his office, the first thing Stanley does is explain to them how bankruptcy works and the difference between Chapter 7 and Chapter 13 bankruptcy. Then he explains what bankruptcy can do, from staying creditors which are enjoined from taking action outside the bankruptcy court, to helping them get their finances back on track.
Stanley says it’s up to the debtor to decide which type of bankruptcy is for them, but most people who do not owe too much prefer to choose Chapter 13 and pay their debts. Yet, sometimes the debt is so oppressive they choose Chapter 7 and discharge those debts.
Benefits to bankruptcy
In many cases, bankruptcy allows people to keep their home and car, Stanley says.
“It enables them in Chapter 13 to get on a budget and start planning. It’s amazing that bankruptcy can really be a learning process,” he says. “In a chapter 13, they can learn how to budget and [see] where their money goes, and tend to look at it a little more closely then and hopefully not make some of the mistakes in the future that they have made in the past.”
Perhaps the biggest advantage of bankruptcy, particularly in Chapter 7, is the fresh start that it gives individuals, he says.
“All of us make mistakes in life, and bank debt is no exception. Bankruptcy gives them the opportunity to start over again and not be held back by this insurmountable debt that has amassed over a period of years,” Stanley says.
Drawbacks to bankruptcy
When filing bankruptcy, one of things most often on people’s minds is how this action will affect their credit. In Chapter 13, the person cannot borrow money without court permission, Stanley says. If they need money for situations like purchasing a new car, they must have permission from the trustee and the court. This is because the idea in Chapter 13 is to get the debtor out of debt and give them a fresh start, Stanley says. Chapter 13 can last anywhere from three to five years as well, he says, and during this time, the court will not allow them to incur new debt unless it is in their best interests to do so.
While sometimes, amazingly, people can get credit after a Chapter 7 bankruptcy that they couldn’t get before filing bankruptcy. This happens because a creditor knows that this person cannot seek bankruptcy again on that debt for eight years, and therefore lends with the good chance of recovering that money over an eight-year period. This doesn’t mean someone should file a Chapter 7 just to get credit, because they want to avoid being in this situation again, Stanley advises.
Bankruptcy today
“In times past, I think there was a greater stigma to bankruptcy than there is now, and maybe that’s because as a country we’ve fallen on hard times, and a lot of people, through no fault of their own, are out of work, and … still can’t find jobs, and so don’t have much choice,” Stanley says. “They can’t pay those bills.”
Judge Ralph Kelly once observed the interesting anomaly that when the economy starts to recover and people go back to work, the bankruptcies increase. This is because, while the debtor has been out of work, his creditors might have sued him but couldn’t get anything out of him because he didn’t have any income. Yet when he goes back to work and has an income, they can garnish his paycheck. Stanley says he has observed this to be true over the years as well.
Sitting down with an attorney and laying out your personal situation to find the best means of recovery is the first step. In the end, after weighing the positive and negative effects of bankruptcy, the choice is for the debtor alone to make.