I have friends who have spent most of their working lives treading water when it comes to finances. Everytime their income increases (raise, new job, etc.) they add another debt. Everytime their income decreases they begin racking up credit card debt to make their monthly payments. The latter is so common there is even a term for it; it's called "subsistence living."
Most people who tread this financial water are able to dig themselves out if given enough time. But what happens when the income takes too big a hit or debt grows too high (unforseen medical expenses, etc.). That is when you might consider taking advantage of the Bankruptcy Code. Bankruptcy is a process under federal law designed to provide financial relief to the debtor by resolving and settling debts, and provide protection to creditors. There are special courts set up for administering the bankruptcy laws under the Bankruptcy Code. Bankruptcy is not designed to give creditors everything they would have been entitled to had bankruptcy not been filed. Instead, bankruptcy is intended to provide the debtor with a fresh start in his or her financial affairs while allowing creditors to recover at least a portion of what is owed.
The Rules Under Liquidation
The Bankruptcy Code allows anyone who is a resident, domiciled, conducting business, or owns property in the United States to file bankruptcy. This applies to those who are U.S. citizens or have a greencard. Recent legislation has severely restricted the ease with which a debtor may file bankruptcy so you may want to consult a bankruptcy lawyer before filing. The debtor does not have to show that he or she is insolvent (i.e. can't pay the bills) to qualify for bankruptcy, but if the debtor has had a case dismissed for lack of cooperation the debtor is prohibited from filing again for a period of 180 days. This provision is designed to prevent debtor's from stringing out creditors by having a case dismissed multiple times.
Automatic Stay
Once the debtor files for bankruptcy protection an "Automatic Stay" goes into effect. This means that all collection actions taken by a creditor must immediately cease. The Automatic Stay applies to all creditors whether they know about the bankruptcy or not.
One common scenario is when a home is foreclosed on and set for auction. I have been at the courthouse steps on more than one occasion to bid on a foreclosed home when the court clerk received a telephone call from the bankruptcy court instructing that the auction be cancelled due to bankruptcy filing. Many debtors, in fact, wait until the day and hour of the foreclosure auction before filing bankruptcy realizing the filing will prevent sale of the home. Even at this late hour the Automatic Stay goes into effect.
Order of Adequate Protection
This does not mean that the debtor does not have to pay for the home. To the contrary, the bankruptcy court will draft an order of adequate protection to protect the creditor. If the debtor wants to keep the home, the order will direct that the debtor bring all arrearages current and continue monthly payments during the course of the bankruptcy proceedings. If the debtor fails to make the payments as provided in the order the credior can apply for a default and have the Automatic Stay lifted to pursue the foreclosure action.
If you are planning on filing bankrupcty, you may first want to contact an estate planning attorney. Ask him about the Enhanced Life Estate Deed a/k/a the Lady Bird Deed.
Financial Documents
If you file for bankruptcy protection you will be required to provide financial and legal forms showing your assets and liabilites. Do not try to hide assets. If you are found to have obtained a bankruptcy discharge while hiding assets, the court will reopen the case and severly penalize you for your fraudulent misrepresentations.
