A blast from the past..

Happy Sunday!

I know, I know..two updates in two days, that is just crazy. I'm really trying to make the effort to bring this back so here I am yet again. Tonight though I think I have a treat for you. What I'm posting is an article that I wrote from my personal finance column for Boston.com. I've been seeing a lot in the news lately about the rise in filings for personal bankruptcy, so I went looking through my articles. Turns out I covered this subject in a Bankruptcy 101 kind of way back on June 29, 2009. Take a look through and I hope you enjoy it..

Cheers!

"Welcome to another, hopefully productive, Tuesday morning. All I can continue to say is thank you to everyone who contributes for your continued support. Today my hopes are to get into something a little more focused and a bit hot buttoned – bankruptcy. It’s been all over the news lately and it’s one of the most requested topics to date. So far the best comment I’ve received on the subject had to do with a concern from a GM vehicle owner wanting to know if he would be able to get his car serviced reading that the company filed for bankruptcy. I proceeded to respond, as quickly as I could, that you can rest assure a company like that isn’t just going to throw in their chips and walk away.

All forms of bankruptcy correspond with chapters in the Internal Revenue Service Bankruptcy Codes and there are six major filings for bankruptcy. The three most talked about filings are Chapters 7, 11 and 13 which we will cover in more depth than the next ones mentioned. The other three are Chapters 9, 12, and 15 and we’ll cover those very quickly now. Chapter 9 has to do with the adjustment and repayment of debts that a municipality is responsible for. Chapter 12 has to do with the adjustments of debts for and protection of family farm and fisherman assets. Last but not least is the Chapter 15 that has to do with insolvencies that stretch across national borders and the process for bankruptcy estates to be settled when there is more than one country involved. Sorry for the rapid fire but I could talk about this stuff for a lot more than the seven hundred-ish word limit that I constantly spill over.

A broad definition for bankruptcy just to set the foundation is; a process that a debtor initiates when they, individual or business, are unable to satisfy financial obligations they are responsible for. It’s not just about getting off the hook for credit you might owe. Something that people might not think about when they enter into bankruptcy proceedings is any debt that may be forgiven or cancelled by the creditor turns into income on the borrowers side which means extra tax liabilities come April 15^th. So on top of the stress to your credit health there may be an extra financial liability by the end of the proceeding.

Chapter 7 paints the picture of the person who may be more than just be down on their luck. What I mean by that is they are unable to satisfy current debts and have no form of regular income, if you make too much you will not qualify for Chapter 7. What happens here is the Chapter 7 filings begin with the courts and a “bankruptcy estate” is created. It’s the job of the court to turn whatever assets they need to into liquid cash and pay the creditors that are owed. There are assets that are exempt from liquidation and they vary by state but some common ones are your Declaration of Homestead, life insurance benefits, and pension funds. Most likely as soon as the proceedings end you are discharged of any debts because your assets sold satisfy them all. After the procedures are concluded the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA of 2005) states eight years must pass before you can file for Chapter 7 proceedings again.

Chapter 13 is along the same lines as Chapter 7 and is often times preferred. In Chapter 13 you have the opportunity to create a plan to repay creditors over a time period. It’s more about debt reduction and court appointed repayment deadlines than it is about straight out liquidation. A trustee may be assigned to your estate by the court but you get to keep control over your assets. It’s up to the court to decide whether your plan meets the Chapter 13 requirements and can make changes to it depending on your situation. Unlike Chapter 7 though you aren’t cleared until the proceedings are through, meaning you aren’t discharged of the debts until your planned repayments are finished. While the plan is in effect you are protected from further actions that creditors may seek otherwise, i.e. lawsuits and further garnishment of wages. Time between filings here are four years by the BAPCPA of 2005.

The big one in the news is Chapter 11. What happens here is under court supervision businesses are allowed the opportunity to create a plan similar to what the individual does in Chapter 13. Businesses have the chance to cancel contracts, sell assets, and restructure corporately to repay debts owed. The goal for a business here is to come out still in business and making profits again. The courts are very much involved and have the ultimate say on the details of a plan. So in GM’s case the very-important-people not arriving in a private jet makes a good impression on the courts.

That in an, abbreviated, nutshell is the difference between the different kinds of bankruptcies out there. In the articles to come I’ll try to break them out better individually, so we can really sink into the demystification of bankruptcy. If it’s something you’re considering or just want to learn more about in the mean time, IRS Publication 908 of 03/2009 is a good starting point found at www.irs.gov. My hope is at the very least is I was able to bring up some talking points about a word that’s clouded in propaganda and fear by the media and by people who might not know the differences out there. I’m sure the farm families that get to keep their farmsteads in bad times can appreciate it so it’s not all bad right?

Cheers!"