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The Lure Of
Bankruptcy
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Here is a true story about
bankruptcy, and the advantages it offers. A husband and wife team of
practicing psychiatrists, with a joint income of $78,000 per annum,
accumulate personal debts totaling $22,000, and also have
outstanding a $33,000 mortgage on their comfortable suburban New
York home. They are not in arrears, nor even over their heads. They
simply seek more discretionary spending power.
Their solution to the
problem? They file for bankruptcy and are able to immediately reduce
their debt load to a mere 10 cents on the dollar, repayable on an
extended schedule in very small amounts. An officer in one of their
finance companies notes that they could refinance the mortgage or
even sell the house. But you will see in a moment why that was not
necessary.
Traditionally, personal
bankruptcy has been a desperate last resort for those so deeply in
debt and harried by creditors, that there really seemed to be no
other solution. The typical profile included low-income, under-
educated clerical workers or laborers, or perhaps transient
non-homeowners. Common age groups were those who were in their
twenties, or those over sixty five years of age.
This is no longer the case.
Today's profile includes people with good jobs, even families with
two incomes. It is not surprising to find those with six-figure
incomes declaring bankruptcy. The process comes no longer out of a
dire necessity, but it is now a means by which people can rid
themselves of debts that cramp their lifestyle.
The most common applicants
for bankruptcy include recent college graduates who file in order to
avoid paying back government-guaranteed student loans. Their
rationale? They feel society owed them an education.
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You will also find older,
"keep up with the Joneses" types filing for bankruptcy. For suburban
executives to Wall Street professionals, they are unwilling to live
within their means.
The passage of the Federal
Bankruptcy Act of 1978 made the whole process much easier. This
change significantly liberalized personal filing procedures in the
name of consumer rights.
Chapter 7 makes no
reference at all to the debtor'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 $7,500.00 equity
in the debtor's house (15,000 if both file); $4,000.00 in accrued
dividends; $1,200.00 in automobile equity; $500.00 in jewelry; $200
per category of household items (including clothing, books, etc.)
and more!
Chapter 13 requires that
debtors show only a regular income to handle a reasonable three-year
pay-back plan. The court's definition of reasonable happens to be as
little as 1% to 10%, even when a payment of 50% could easily be
managed.
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