History of Bankruptcy

2006 Assets Learning Conference Session III.8 Understanding the New Bankruptcy and Credit Laws: Implications for the Field Facilitated for the Assets Alliance by: Janet Wills Wills Resources 8250 Wills Court Rogers, AR 72756 Phone & Fax Number: (479) 925-4001 E-mail: janetwills47@yahoo.com Ramona McKinney Asset Builders Program Director Southern Good Faith Fund 2304 West 29th Avenue Pine Bluff, Arkansas 71603 Phone Number: (870) 535-6233, ext. 15 E-mail: rmckinney@southerngff.org History of Bankruptcy  Roots of word traced to medieval Italy – “banco rotto” which means broken bench  Early U. S. bankruptcy law was modification of British law  1800’s – First federal bankruptcy law signed by President John Adams in 1800 2 more laws passed and repealed until the Bankruptcy Act of 1898 1900’s and Beyond  A bankruptcy environment that had as its focus helping debtors seek a new start remained in place for most of 20th century.  By beginning of 21st century creditors successfully argued that this current law and environment were too easy on debtors BAPCPA  The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed and went into effect October 19, 2005 Interruption in our presentation  There is a blank page in the back of your packet. As we are talking today about bankruptcy and credit, please use it to jot down some of your thoughts on how this new bankruptcy environment is going to impact you and the people you serve.  Specifically write yourself a note or two about at least one bankruptcy proceeding you know about personally. Then in 20 words or less state what you think the contributing cause was for that person’s financial problems.  We will want to hear your thoughts later. Types of Bankruptcy     Chapter 7 Chapter 11 Chapter 12 Chapter 13 Chapter 7  For personal bankruptcy  Often referred to is liquidation bankruptcy  Debtors turn over nonessential assets to bankruptcy trustee, who then sells it off and distributes proceeds to creditors eliminating debt completely  This type of bankruptcy was most affected by the BAOCPA Chapter 11  For corporations that want to reorganize their finances and remain in business  Features a debt repayment plan Chapter 12  For family farmers and fishermen  Features payment plan and debt restructuring Chapter 13  For individuals  Features debt repayment plan  More individuals who previously would have filed under Chapter 7 will be forced into Chapter 13 Changes with the BAPCPA  Means test  Required Credit Counseling  Required Debtor Education Means Test  To qualify for Chapter 7 “liquidation bankruptcy” individual must pass means test – Income must be below state’s median income – Or if it is above, debtor is subject to means test  Monthly income less allowed expenses – If after all these subtractions the total monthly disposable income is less than $100 the debtor has passed the Means Test Means Test cont.  If disposable income is more than $166.67 Means test is flunked and debtor is not eligible for Chapter 7, must go to Chapter 13  If disposable income is between $100 and $166.67 then calculations are figured to see if what is left over is enough to pay off more than 25% of unsecured debt over 5 years.  In other words – the means test is not easy. Required Credit Counseling  Debtors filing for Chapter 7 must complete required credit counseling & debtors must pay for it.* Credit Counseling must be provided by a qualifying 501(c)3 organization that has been approved by Bankruptcy Trustees. *fee can be waived Debtor Education 2 hours required  Required topics  Budget Development – Setting short-term & long-term financial goals as well as developing skills to assist in achieving these goals – Calculating gross monthly income & net monthly income – Identifying & classifying monthly expenses as fixed, variable, or periodic Debtor Education Required topics cont  Money Management – Keeping adequate financial records – Developing decision-making skills required to distinguish between wants and needs and to comparison shop for goods & services – Maintaining appropriate levels of insurance coverage, taking into account the types and costs of insurance – Saving for emergences, for periodic payments, and for financial goals Debtor education required topics cont.  Wise Use of Credit – Types sources, and costs of credit & loans – Identifying debt warning signs – Appropriate use of credit & alternatives to credit use – Checking a credit rating Debtor Education required topics cont.  Consumer information – Public and non-profit resources for consumer assistance – Applicable consumer protection laws and regulations, such as those governing correction of a credit record and protection against consumer fraud Approved credit counseling and debtor education can be provided     In person Internet Telephone (can be approved for a combination of internet/telephone. That is the approval we have) www.usdoj.gov/ust/  The U. S. Trustees home page – A Huge wealth of information www.usdoj.gov/ust/eo/bapcpa /ccde/cc_approved.htm#AL  Web site (part of the trustee web site) for list of approved credit counselors and debtor education providers – Click on state – Click on your judicial district Bankruptcy and the Future • At first it’s a relief – you file for bankruptcy, the creditors stop calling and harassing you, and the juggling act ends. • Many people who file bankruptcy ask, “Now what can I expect?” • Let’s begin looking at “what’s next” by completing the quiz. 1. Bankruptcy will stay with me forever: True. • Bankruptcy will expire from your credit report after 10 years. • Some credit reporting agencies may remove Chapter 13 after 7 years. • Bankruptcy is for life – if you apply for insurance, credit, or a job you can be asked if you have ever filed for bankruptcy. There is no time limit even if it is very old. 2. The accounts included in my bankruptcy will be removed from my credit report upon discharge: False. • Accounts included in bankruptcy expire independently from bankruptcy. • These accounts will be marked “Included in BK” on the credit report. • They will remain up to 7 years after filing. • After discharge the balance must be reported as “0.” 3. I will never get credit again: False. • You can expect receive many offers of credit. • Many of these may be from unscrupulous creditors with activation fees and/or membership fees. • There are “debtor-friendly” agencies that specialize in credit repair loans. • Do not be too eager to get credit again – know the terms and conditions of the credit. 4. I will not be able to by a home for 10 years: False. • There are some lenders who prefer to deal with consumers with good credit and will not do business for the 10 years it remains. • It is not a quick fix, it may take those in Chapter 13 three to five years to complete their payment plan. • With strides to rebuild credit and no new negative “marks,” you may be able to receive a conventional mortgage within one to two years. 5. Even after bankruptcy I may still have some of my existing debt: True. • Even with Chapter 7 not all debt will be discharged, it depends on the type of debts that are owed. • Certain debts that cannot be discharged include: most taxes, child support, most student loans, court fines and criminal restitution, and personal injury. • Debts incurred after filing for bankruptcy will not be included. 6. I will lose all my property if I file for bankruptcy: False. • With Chapter 13, which is like a payment plan, you may be allowed to keep property. • Chapter 7 involves the sale of all assets that are not exempt. • Exemptions differ from state to state but typically allow: equity in home, insurance, retirement plans, personal property, car, public benefits, and/or tools used on job. 7. Filing for bankruptcy will lower my credit score: True. • The drop in the credit score will depend on the type of debt and payment history prior to filing. • Credit score is calculated using a complicated algorithm that takes into account hundreds of factors and values. • It is very difficult to predict how the credit score will be affected but bankruptcy is one of the most negative factors included in the report. 8. I cannot file for bankruptcy for 8 years after discharge: True. • This is only true for Chapter 7. • Chapter 13 waiting period is shorter and can be as little as two years. 9. After bankruptcy all my debts will be free and clear and I will have peace of mind: False. • As stated in #5 all debts will not be discharged. • Bankruptcy is listed in the top five life-altering negative events that one can go through. • Bankruptcy is life-altering and leaves deep wounds both to the psyche and the credit report. 10. After bankruptcy I will need to take steps to protect myself from another bankruptcy: True. • Even if the bankruptcy was through no fault of your own it will be a good time to examine what led to bankruptcy to begin to prepare for unforeseen events. • Take a critical look at spending and saving habits. • Implement strategies to control spending, develop a budget, and start a savings plan. Let’s Talk About It • Implications to the IDA field • The “typical” person seeking bankruptcy • Contributing causes