Can someone please explain how bankruptcy works to me.

[mumom95]

No, I'm not filing bankruptcy. The whole thing just doesn't make sense to me and I'm wondering if I don't understand something or if the system is just this screwed up.

I have a good friend who just finished filing bankruptcy. Yes she's a good friend, this won't affect our friendship, and I'd never say to her what I'm going to say on this thread because I wouldn't want to hurt the friendship or her feelings. None of that changes the fact that I don't agree with the fact that they filed bankruptcy. And I know all the info I know because she has told me.

They are a family of 4. Her dh did get divorced about 15 years ago and in the divorce took all of the debt (he took all of the debt and in return the ex has no claim to his pension plan. He works for GE and has for almost 20 years). Apparently the debt was about $75,000. They've had not major tragedies in life that would cause a financial burden.

They live in the Cincinnati area and their house cost just under $200,000 So not a tiny mortgage, but nothing extravagant. She doesn't work, but her dh makes about $130,000 a year and has made over $100,000 a year for the past 10 years.

I don't know how much total debt they have now (the only numbers she specifically told me was the $75,000 from the divorce 15 years ago). But I do know in the past 5 years they've put in a pool, new hardwood flooring, bought a trampoline and gone on multiple vacations a year, along with other stuff.

And now I guess the debt got to much for them, so they filed bankruptcy. Here's the kicker, she commented the other day that with getting rid of most of the debt they now have plenty of money to do things with. They apparently can't use a credit card, but her dh makes such good money that since they don't have the debt, they have the cash to use.

This is what I don't get. If they were to buckle down and really penny pinch, they could have paid off the debt given their income. It would have meant a couple of years of giving up the vacations and shopping, but it could have been done. Why in the world would a judge allow them to file bankruptcy? Shouldn't a judge look at them and say "stay home, eat mac and cheese and just pay off your debt."

Can anyone just file bankruptcy? It doesn't seem right that people with a good income and no major financial tragedy can just get rid of their debt. Because once they get rid of the debt they still have the good income to fall back on. Honestly, my friend won't need to borrow money from the banks for a long time because they already have their house, got rid of most of their other debt and make a good income, so they can just pay cash for what they want.

Anyway, I'm just asking, because honestly, it doesn't make sense to me. Is bankruptcy ever denied? And if so, how rich do you have to be for it to be denied?

 

[MomToOne]

Do you know what type of bankruptcy they filed?

Remember that there is probably plenty of stuff your friend isn't telling you - I'm sure she's trying to make her situation look the best it can to you. But reality can often be very different.

Here's a good website to read up on the different kinds of bankruptcy and what's required of you:
http://www.uscourts.gov/bankruptcycourts.html

 

[NYCDiane]

Bankruptcies can and do get denied all the time. They probably had a lot more than the 75K debt left over from his first marriage.

The attorney puts together a bankruptcy package that shows your income-to-debt and how much you have to pay each month for basic living expenses, etc. Unless something jumps out at the judge that doesn't look right, 99% of the time, the bankruptcy will be granted and the debt discharged.

If your neighbor filed Chapter 7, all their debt is erased (except debt they wanted to keep such as their mortgage)

If they filed Chapter 13, they are on a payment plan to pay the debt back and the payments go through a court-appointed monitor.

 

[Disney-Kim]

just because you have high income doesn't mean you shouldn't be able to start over just like anyone else...and besides anyone with an income over the states median income (which are low) has to do ch 13 unless there are lots of circumstances. Being rich does not get you denied for a ch 13 BK. You have to qualify for a 13 and be approved by a court Trustee. Once missed payment over 5 yrs and you could be kicked out of the BK. The payments can range from 100's per month to 1000's per month....it all depends on how much DMI you after the BK tests. You make a lot...most likely you will pay a lot back.

ch 13 is a reorganization and payback of debt. You get to pay back your creditors on a reduced % rate and with no hassles and collections. Its more protection that a CCS debt consolidation thing.
You make payments for 3-5 years and then you are done. It is not an easy thing and not something to be belittled. Its a way to pay back your debt when the regular ways don't work.
Yes it hurts your credit for 7 yrs (not 10 like chpt 7) but after a few years you are able to get car and home loans and eventually credit cards...although at the end of a ch 13 most have learned to live within a cash budget and are much more successful financially...not wanting credit cards anymore. It really teachs people to budget and be financially smart.

try to be understanding of your friends and not judge. There is always more to the story and she could probably use your support.

 

[kidsister]

I used to think that bankruptcy was mostly because people couldn't control their credit card spending OR huge medical debt.

But I've learned that divorce counts for a lot of filed bks...in fact, it may happen to me.

I don't buy anything I can't pay for and always pay my cc in full every month.
But my X really screwed me in our divorce and refusess to pay me what I was awarded while at the same time getting the judge to reduce the amount awarded me....by LOTS. So I was to get $500k for my share of the house I spent 5 years of my life building...but the contract on the property is to a friend of X for so little that I won't get anything from the sale. If I declared BK,then my unsecured debt (mostly to X) would be discharged and I could salvage maybe $50k from the house. (while not $500k, its at least something)

So, it isn't always people spending too much...sometimes it is debt that was
foisted on you by a dead beat x, or medical bills, or some lawsuit.

The new rules (2005) make it harder to cheat the system. Try not to judge your friend too harshly...you might be surprised at how many of your friends declared BK at some point in their lives.

 

[jessica52877]

I could have written almost this exact same thing! I don't understand it at all! I am responsible and pay for what I buy but I see others who aren't. And the others I am speaking of I know their situations. DH makes less then $50,000 a year and we live on it!

 

[mumom95]

Honestly, I'm really not judging my friend all that much (but I will admit, a little). I'm more judging the system.

You're right, I'm sure there is a lot more to my friend's debt than she is telling me. I have no idea what chapter she filed. She had a bunch of people over her house the evening after the court date and just said that she was so relieved that she no longer had to worry about her debt and she could start spending money again. I do know she said she couldn't have a credit card, but they have a decent amount in savings. I don't know all the details but apparently they transferred all the money the had in savings to his adult daughter (who is in college) a while before the bankruptcy and after the bankruptcy she just transferred it back. So I get the impression they aren't short on cash at this point.

I know things happen in divorce. But he chose to take the debt so that his ex couldn't touch his pension. Now he got rid of the debt at the creditors (and ultimately ours) expense, and still has his pension. It just doesn't seem right.

I guess I just didn't understand the system. They could have paid off their debt. They put in a $30,000 pool (actually, I don't know how much it cost, but we've priced pools and that seems about the amount for this area). $30,000 would have gone a long way towards paying off the divorce debt. I'm guessing they took a loan out for the pool too, which added more debt, but I'm not sure. They chose not to pay off the debt. Instead, they chose to live the life they wanted and then file bankruptcy. I just personally think our bankruptcy system should be set up where people like this are denied.

I would never say any of this too my friend because I wouldn't want to hurt her feelings. None of this changes the person she is and always has been, it's the same person I've come to care about over the years. But I'm not so sure she needs my support. She really seems quite pleased and relieved with the whole thing.

I just think the system is messed up and I think a lot of people take advantage of it. But, I'm old enough and wise enough to know this is the case with so many things in life, it isn't worth me losing sleep over.

 

[zscfan]

I filed for bankruptcy last year--I freely admit it was because of my foolishness. When I was in my twenties, credit cards were so easy to get and my limits were so high. I didn't understand the whole interest thing, and how I would be paying on these purchases for many years. I didn't know it would be so difficult to pay the cards off.

Long story short, I realized it would be impossible for me to ever pay the cards off--I had no savings and once had to cash in my change at Coinstar just to pay for a RX. And I was only making the minimum credit card payments.

But by filing bankruptcy, I learned many things. Cash is king, emergency savings is crucial and if I can't pay cash for it, I can't have it. I keep my checkbook balanced down to the last cent. I think I have learned a lot about financial responsibility.

Yes, people have and always will cheat the system. In all areas. I know people who collect unemployment because they refuse to take a job that pays a penny less than their previous job or because they feel some jobs are beneath them.

The OP mentioned the money transfer--I do know that all transfers of cash or assets in the year before filing must be reported to the court.

 

[Ladybugsy]

I have never filed, but what I don't understand is why it's different for "regular people" and not for businesses. Businesses file bankruptcy all the time. Guess what! Even Walt Disney did. And it's just a business decision. I'm not condoning filing for bankruptcy it in the least, especially if you are able to take control and live up to what you should but it can be a tool to get your life back on track when things get out of control. Bad things can and do happen. Divorce, health issues, job loss. Why is bankruptcy for businesses ok, and yet "regular people" have a stigma attached to them? Are people less responsible and less worthy of our respect because they have tradgedies that devastate them financially? We give money every day to businesses that have filed for bankruptcy sometimes more than once! Plus since they changed the rules a few years back, it's not as easy as it once was. I guess I just don't think that it should be such a horribly embarrassing thing. There are strict criteria that have to be met. If a person can meet them, then they're entitled to the help.

Even the Bible says that debts should be forgiven every 7 years...

 

[zscfan]

Good point...many businesses do file bankruptcy!

 

[LanaJae]

To me, that filing was illegal and I think they would be in serious trouble with the transferring of the savings to the daughter and back again to themselves - and to brag about it? It can be reported here: http://www.justice.gov/ust/eo/fraud/index.htm and it should be reported. That savings should have been used to pay down their debt.

 

[Planogirl]

It sounds like people are still cheating the system at times. But many people do file because of job loss or medical debt. I sympathize with them and I also sympathize with people who just let their debt get away from them because they don't know how to handle it. My DH is such a person. I think that he would likely be in big trouble if he had to handle his debt and he agrees.

 

[heatherleigh]

I like the point one of the previous posters made in regard to businesses vs. individuals. I'm not one to judge, particularly when I do not know the full situation. Good for her to get rid of her debt, and be able to start fresh. There are already laws in place and she had to go before a judge who seemed to think she was eligible. I would trust that they did their job, and she was informed when she did what she had to do. I don't think anyone "wants" to file bk, it's a tough choice to make.

 

[kawing123]

People do this all the time. Some can take home equity lines of credit in the past and buy expensive adult toys like campers, cars, snowmobiles etc and then they foreclose on their homes and keep the stuff without penalty most of the time. Cheating the system is a way of life. I mean if a bank gave me a 100,000 home line of credit and I used it for all that stuff thinking I was well to do, than that is what has happened and hopefully will not happen in the future. Your friend spent beyond their means they did not wake up one day and say oh we are in over our heads. They put in a pool, flooring, vacation etc... This was probably in the back of their heads all along, lets do these things now and then claim bankrupcy. People sometimes forget that cc and lines of credit our meant to be paid back, and does not determine your wealth. Actually, they all should be jailed because it is a consumer crime. People are vary manipulative. There is a senior citizen in our area who drives and new car, has two collector cars in the garage, hires people to do things absolutely unneccessry and has not paid property taxes for years. All these goodies are probably in a relatives name so he is a senior who qualifies. Ten years ago he built the home it is not as if he has lived in this newer home his whole life. Just amazing the scams that go on.

 

[Fanoffun]

Before the Bankruptcy Reform Act which took effect in 2005, anyone could run up their credit card debt and take out as many unsecured loans as they could, then just file Chapter 7 and wipe all the debt out. Then they could start over with no debt. The really egregious cases would get looked at by courts if creditors complained and those cases would get thrown out. The impediment to keep most people from doing that at the time was the humiliation associated with filing bankruptcy. As time went on, the humiliation factor seemed to become nonexistant and the number of bankruptcy filings skyrocketed. It was no longer seen as a bad thing to do - it was smart to legally get away with obtaining all that credit and not having to repay it. Many creditors complained and lobbied for a fairer system. The Bankruptcy Reform Act was enacted and did away with those types of filers. However, like anything else, the bankruptcy laws do not and can not account for those who hide assets or money without getting caught. I would say that bankruptcy is incredibly helpful and needed for those who have encountered those life changing experiences or situations (health issues, job losses) which are not their own fault.

 

[seashoreCM]

Sometimes bankruptcy is the lesser of two evils, the other being being charged excessive interest rates.

Often creditors will become more reasonable in their interest rates when the debtor just proposes a bankruptcy.

 

[Disney-Kim]

sadly people do abuse the system and to brag about hiding assets is scary...you could go to jail for that

to each his own...your friend doesn't sound like they did ch 13 if they walked away from it all...you still have to pay for 3-5 yrs and the courts take all your disposable income...not what YOU think is your DI...but what the courts mandate....they don't allow for your true expenses. Its a hardship to live thru and you are definately not living big......

luckily most people do the right thing...there are always those who don't

 

[bopper]

Also having a bankruptcy is on your Credit Report...so who will want to give a loan or credit to someone with bankruptcy?

 

[Shreggor]

Also having a bankruptcy is on your Credit Report...so who will want to give a loan or credit to someone with bankruptcy?

You'd be amazed. They can't file again for 7 years at least, it will be harder if they file again. AND the lender can charge insane interest rates. When my roommate filed, he had a ton of offers within weeks. He's got more debt now than he knows what to even do with and this past year he got a mortgage on top of it... it's madness.

They'll give anyone a loan for anything. It's up to the individual to understand whether or not they can really afford it.

 

[kbeam]

I think filing for bankruptcy, like applying for welfare, should be done and approved of in very rare and extreme cases. These programs were never designed to be abused, to use as a crutch....but rather for those with absolutely no other alternative (avalanching medical expenses, spouses killed in wars, etc...). To spend money haphazardly is not only incredibly stupid, it's selfish. When someone absolves their debt, it doesn't just 'disappear'...it's trickled down to the rest of society.. to the consumers who are conscientious and pay for what they purchased. Rates are raised across the board to compensate. I'm certainly not against bankruptcy, if absolutely NEEDED (not desired), but I am opposed to the ease and frequency people seem to get approved...putting the onus on the rest of us.