- Strategies for paying debts video
- Steps to help you get out of debt video
- 7 steps toward debt repayment article
- Should I pay down debt or save? article
- 5 questions to decide whether to pay down debt or save infographic
- Defining personal bankruptcy video
- Negotiating with creditors video
- KEY TAKEAWAYS
Defining personal bankruptcy
Before you turn to filing for bankruptcy, get an understanding of how the process works, what chapter 7 and chapter 13 bankruptcy are, and why bankruptcy should only be used as a last resort.
Ever since people have been lending money to each other there's been one fundamental problem. What happens when someone can't pay back their debts? Can't pay back. What are you going to do? And before I really jump into what we do now in our modern society, let's get a couple of the words out of the way that we're going to use a lot. And these are words that you'll hear a lot in the context of debt, or in the context of loans.
So, on one side of the transaction you have the debtor. And this is essentially the person that borrowed the money, borrowed money. And because they borrowed the money they know owe money so you can either say that they borrowed the money or that they owe money. They owe the money.
On the other side of the transaction you have the creditor, creditor. This is the entity or the person that is owed the money or they lent the money to the borrower. So, they lend the money. They lend the money.
So, we have our words out of the way but let's go back to our fundamental question, what happens when the debtor can't pay the creditor back the money that the creditor is apparently due? Well, if, you know, if we go back through the, through, through human history they've come up with, ran , you know, various solutions to this, to this problem, we can call it. If you go back to ancient Greece, ancient Greece, they had a very simple solution to it. The debtor, if the debtor can't pay back their debts will then become a debt slave to the creditor, so they became a debt slave. So, if the creditor needs some gardening done or would like his or her house cleaned more regularly the debtor and actually probably the debtor's family would have been, had to do whatever the creditor wanted until they essentially paid back their debt through their labor. So, that's how Greece handled it, you know, it's kind of shocking to us now but that was their solution. You decided to borrow money, you can't pay it anymore, this is what you got to do.
Now, if we, if we fast forward a little bit to maybe medieval Europe and this is, you know, this is even, uh, Charles Dickens's father was even, uh, caught into this, into this kind of a bind. But until kind of the early or mid-1800's in Europe and the United States you had the notion of debtor's prison, debtor's prison. And frankly, I, you know, when I describe this to you you'll find that it's even worse in my mind than being a debt slave. In debtor's prison they would throw you in jail so that they would throw you, they would imprison you and that's why it's called debtor's prison and you're not coming out until your family pays off your debt, your family or your, maybe your friends if you have good friends, pays off your debt, off your debt. And I, you know, just thinking about why this is especially horrible, at least here you have your chance to work off your debt. Here, if your family, uh, either, you know, if, if, in my situation right now, you know, if I get thrown in prison will my ten month old son be able to pay off my debt? No. I'm just going to rot in prison forever. Or what if my family doesn't like me? Or what if, uh, I have no family or friends? It's just for, you know, I might have owed someone the equivalent of now, of $1,000 and because of that I could serve a life sentence in prison. So, uh, you can imagine that debtor's prison could be, could be quite harsh. And actually Charles Dickens' dad was in debtor's prison. So, it's, it's, uh, it, it can kind of tell you a little bit about why he writes the type of books that he does. But, anyway, this is the past.
We are now a civilized society and hopefully we have a better way of dealing with the situation when a debtor owes a creditor money. And that's the topic of this video. And so now what we do is something called bankruptcy. And just so you know, the first versions of bankruptcy weren't that different from debtor's prison, they were actually more to protect the creditor than to protect the debtor. But now we have bankruptcy laws and for the most part they're to prevent this type of craziness or for someone to spend their entire life on kind of this, a wacky debt treadmill.
So, let's talk a little bit about bankruptcy and I'm going to focus on bankruptcy as it is in the United States. Let me write down bankruptcy in a new color, bankruptcy, bankruptcy. It's going to have a US focus. And in general I'm talking about personal bankruptcy although it, a lot of what I talk about on some level applies to corporations as well and I've actually made videos on that as well.
So, let's say I'm just overwhelmed with debt. I have, I have, you know, $100,000 of credit card loans. Uh, I, I, uh, I have, uh, a mortgage to pay. I have a, a, a car lease that was a little bit over my head. What can I do? So, there's a couple options in the United States. You have Chapter 7, and so it seems very complicated, these are all different, literally chapters of the bankruptcy code.
So, you have Chapter 7, it's called a straight bankruptcy. And this is literally you go, I mean, it's not, uh, uh, a simple procedure but the gist of it is you go to the bankruptcy courts and say, look, I can't pay back my debts and so what they're going to do is they're going to take my assets and then whatever, whatever there is there they're going to split it amongst the, my creditors and then after all is said and done I don't owe anyone anything although I have lost a lot of my assets, some of them are exempt, they let you keep things that you need to live like your, your, your pots and pans and maybe one television and maybe a suit so that you can find a job.
But if I have a bank account, I probably don't ‘cause I, uh, got so deep into debt but if I have some money, if I have, uh, uh, a nice, uh, a diamond ring or, or, or a Rolex watch, they're going to take that from me and that, they're going to, the trustee, the bankruptcy court is going to take that from me, sell it and then give it to all my creditors. But at the end of the day after all is said and done I'll actually be free of all of my debt. So, you can, you, it's, it's kind of a way to break from this cycle of always owing money and always just barely making it or probably not making it at all. So, that's a straight bankruptcy. And, you know, I said, why doesn't everyone do that who is, you know, under a, under a big, heavy load of debt? Well, one there's a lot of rules that makes this easy or not so easy to do. But the other thing is it stays on your credit report for ten years, ten years on credit report.
So, you got to think to yourself, am I going to be better off over the next ten years, uh, continuing to pay off my debt? If I can pay off my debt, if I have any chance, I should probably do that so that I don't ruin my credit for the next ten years but if it's just a hopeless situation I might as well do it. And just so you know, this isn't a cure for everything. If you've got, you know, if you're sitting on $300,000 of student loans I'd say, wow, you know what, let me just, that's going to take me more than ten years to pay anyway, let me just declare Chapter 7 bankruptcy, uh, it, it'll be unfortunate to find out that student loans are not, cannot be forgiven in a Chapter 7 bankruptcy.
And so there's a whole set of, uh, types of loans or, I guess you could say types of liabilities, things you owe to other people that cannot be forgiven, certain types of tax, taxes, student loans, uh, child support. Those won't be forgiven. So, this, you know, this'll definitely apply to things, maybe, like, credit card loans but this isn't just a very, very simple process. So, any of these things that I talk about, you definitely want to, uh, consult, uh, an expert on your, kind of, particular situation to get a little bit more detail. But this is just an overview.
So, that's Chapter 7, straight up bankruptcy. I have, I don't have what it takes to keep servicing my debt, I want a brand new start. Now, the next one or the next one that you're going to be most, you're going to hear the most about, in the context of a personal bankruptcy, is Chapter 13, Chapter 13. This is often referred to as a reorganization, reorganization. And here the idea is, look, I have a salary, I have a job but I just have more debt than is imaginable. And it might not be just because I've been irresponsible, maybe a medical emergency came up in the family or I had some unknown expenses that just popped up out of nowhere. And so here the situation is, look, uh, Mr. Creditors out there, I really do want to pay you back but what you're asking for me to do right now is just crazy. If you, if you asked me to do that I'm just going to end up in Chapter 7 eventually.
So, for both my sake, for me as the, me as the debtor, both for my sake and for your sake why don't we come up with a plan so that I can realistically, so that I can realistically pay you over the next three to five years. And that might involve you saying, hey, instead of, instead of being owed $50,000, you now owe me $40,000 or instead of the interest on my credit card being 20 percent per year, let's change that to 10 percent a year.
So, there'll be a little bit of a negotiation. You're going to have to come up with a plan and then once you come up with that plan, I've got to pay that over the next three to five years, three to five years. Now, once again, you might say, hey, that's pretty good, you know? If I owe $100,000 in credit card debt and, you know, and I kind of go to my creditors and, and make an, you know, and, and look like a genuine individual and make a nice sob story they're going to, uh, lower my debt. I'll be better off than if I didn't do it. But here again there's a, you know, there's a penalty to doing it. And, and once again it shows up on your credit report. And so, in general, you're going to, you're going to come up with a plan for you to pay back your creditors over three years and then after that it's going to show up on your credit report for another seven years, seven years on credit, on your credit report. So, in general from the time you file until the time it leaves your credit repot it's going to be ten years, just like, just like Chapter 7.
So, in either of these situations these aren't things that you want to just jump into and, and think wow, I, I found an easy out, uh, from my debt. These are very serious things that will impact you for, uh, you know, a, a reasonable chunk of, of, of, uh, uh, of your life. So, these aren't simple things to do but they are good to know about just in case you do find yourself a little bit, uh, over your head or a little bit under water or you know someone who's in this situation and at least it is an out where they can feel that, look, if I do this or that maybe over the next, uh, either three years or ten years depending on how you view it, they can, uh, get to a new start. And just so you have a sense of how often this occurs, I looked this up a little bit earlier.
In the US, in the US and as you can imagine we're in the middle of a recession now so bankruptcy filings are kind of, uh, going through the roof. So, let me write this down. So, this is Chapter 7, Chapter 7, and here's Chapter 13. And if you're wondering what are all the other chapters in between, there's a Chapter 12, which is essentially Chapter 13 for farmers and fisherman, they get a few more benefits than the, then the rest of us get ‘cause, ‘cause we want to promote, I guess people who produce food. And then there's Chapter 11 which is, uh, uh, essentially business reorganization. It can apply to some individuals who, uh, are essentially kind of big shots who, you know, their personal portfolios of assets and liabilities look a lot like, uh, a business. So, for them Chapter 11 will be more appropriate than Chapter 13. Uh, so that, those are kind of the two other chapters. But from a personal bankruptcy point of view Chapter 7 and Chapter 13 are what, is what most people concern themselves with.
Now, just to give you the numbers of how often this is occurring, just, you know, if you find yourself in this circumstance just so you know you're not necessarily alone. And also just to see that they really are increasing right now. So, 2007, 2008, 2009, so Chapter 7 filings in the United States in 2007, 413,000. In 2008 it went up to 560,000, so this is, uh, more than a 25 percent increase. And then in 2009, 819,000 filings, essentially double of the month, the number of Chapter 7 filings in 2007. And if you look at Chapter 13, in 2007 we had 277,000 filings, so for every two Chapter 7's it looks like there's about, well, for every four there's about three of these. Then we have 334,000 in 2008 and then 370,000 in 2009. So, you can see that the Chapter 7 ones are, I mean, they're both increasing really fast but Chapter 7 is even more dramatic and you can imagine, because, uh, in a situation where people don't have jobs, Chapter 13 really isn't that viable of an option. They really have to do something like Chapter 7. Anyway, hopefully you found that useful and you know a little bit about bankruptcy now.
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