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Bankruptcy, Foreclosure, & Credit - How It Affects You

Aug 17, 2007
Bankruptcy legislation under US law was first introduced in 1898, by the enactment of The Bankruptcy Act. Thereafter, from time to time, there have been many acts and amendments to laws on bankruptcy in response to commercial and socio-economic demands. Petitions for bankruptcy, filed under chapters 7, 11 or 13 Bankruptcy have different implications.

By filing for a bankruptcy petition under Chapter 7, the petitioner hands himself to the protection of the court. It implies that the petitioner has no hope of ever being able to repay back his debts. The end result is a complete liquidation of the petitioner's assets through a court appointed trustee, subject to exemptions, by way of sale to payback the creditors. Thereafter, the debtor is discharged from his debts. The advantage here is that the court intervenes and prevents creditors from harassing you and makes sure that the debtor is not turned into a destitute after the liquidation of the assets, by exempting certain assets as cannot be attached or liquidated in course of bankruptcy proceeding. However, there are certain obligations and debts that are beyond the scope of that which can be discharged.

The exemptions are fully described in 11 United States Code Section 522.

Petitions filed under Chapter 13 are for unsecured debts under $25000 and secured debts under $750000. The debtor is allowed to restructure interest free debt repayments over a period of three to five years, under a new repayment schedule. The repayments are made to a trustee who appropriates the repayment against secured and unsecured debts, as per directions of the court. Creditor approval is not required and if the creditor(s) object to the reorganized repayment schedule, the court can force acceptance. The debtor's assets are not categorized as under liquidation although the trustee has control over the finances.

Bankruptcy petitions under Chapter 11 are nearly always filed by businesses, since the limit for filing under this chapter is $2,000,000 and above for secured loans and unsecured loans cumulatively. Though, individuals may also file if the amount falls within these limits. This chapter also envisages a reorganization plan that may have a schedule up to six years. The business continues to run, preserving assets and jobs and the debt is restructured to enable repayment to be made from future profits, recapitalization, mergers or sale of some assets.

Foreclosure

After a bankruptcy petition has been filed, no action for foreclosure can be taken, if proceedings have already been initiated. Neither can someone be evicted if he has filed a bankruptcy petition. However, it is open to the lender to appear before the bankruptcy court to lift the stay, so that he may proceed with the eviction. Since it is a general practice for lenders to take action only after a three-month default, the foreclosure proceedings themselves take anywhere between four to nine months, after which the eviction will have to be conducted.

Credit

Any petition filed for bankruptcy has disastrous results for the petitioner credit worthiness. It spoils and ruins his credit. The bankruptcy related information usually remains on the credit report for a period of ten years. Availing of credit will be difficult and even if you are able to avail credit at a future date, it will be at a much higher interest rate, thereby raising costs.
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