WARNING: The Lure of Easy Bankruptcy

 

Easy Bankruptcy

True tale: A husband-and-wife team of practicing psychiatrists, with a joint income of $78,000, accumulate personal debts totaling $22,000 plus a $33,000 mortgage on their comfortable suburban New York home. They’re not in arrears, nor even over their heads. They simply want more discretionary spending power.

Solution

They file for bankruptcy and reduce their debt load to less than 10 cents on the dollar, repayable on an extended painless schedule. Notes an officer of one of their finance companies: They could have sold the house or refinanced the mortgage, and paid off all their bills in full. But why should they?
Traditionally, personal bankruptcy has been a life-wrenching last resort for people so deeply in debt, and so harried by creditors, that no other option seemed viable. The typical profile: Low-income, under-educated laborers or clerical workers. Very young or over 65. Rootless non-homeowners.
The profile today: People with good jobs. Quite often two-income families. Household incomes are as high as six figures. Declaring bankruptcy, not from dire necessity, but merely to rid themselves of debts that cramp their lifestyle.

Most common

Recent college graduates, file for bankruptcy to avoid paying back government-guaranteed student loans. Rationale: Society owed them the education.
Older, keep-up-with-Joneses types. From suburban executives to Park Avenue professionals, they’re unwilling to live within their means.

Making it easier

Passage of the Federal Bankruptcy Act of 1978. This significantly liberalized personal filing procedures in the name of consumer rights:
• Chapter 7 makes no reference to the deb tor’s income. It permits debtors to clear the slate by turning over all their assets except those specifically exempted to creditors, Among the exemptions: Up to $7,500 equity in the debtor’s house ($15,000 if both spouses file); $4,000 in accrued dividends; $1,200 in automobile equity; $500 in jewelry; $200 per category of household items (clothing, books, etc.) and more.
Chapter 13 requires that debtors show only a regular income to handle a reasonable three-year pay-back plan. Court definition of reasonable: As little as 1% to 10% of the total debts, even where 50% or more could easily be managed.
Payoff: Either way, the law does not require a bankrupt to show financial hardship. The debtor merely claims bankruptcy, eliminates a most outstanding debt, and keeps the most tangible assets. Even the stigma is gone because the law forbids the use of the term bankrupt when legally describing a “debtor.
The economic recession. The Federal Reserve Board’s credit controls that were imposed early in 1980 tightened the screws on many people with debts.
Federal Trade Commission approval of the right of lawyers to advertise their services. This opened the eyes of debtors to the opportunities.

Result

Lawyers are aggressively promoting this new way out of debt. Focus: California, Florida, New York.
Two things lawyers don’t mention in their ads: 
(1) Lawyers always get paid upfront, even before filing the papers; some even accept credit cards.
(2) The bankruptcy goes on the client’s credit record for up to 10 years, meaning the slate is not clean. 
 
Clients cannot even seek to square matters with past creditors.

Reason

Reaffirmation of debts, once they have been wiped out, is prohibited, unless the offer is court-approved. (Chances for that are slim).

 

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