Most Bankruptcy Plans Fail
Most bankruptcy plans fail because debtors often discovered payment plans are too restrictive. Debtors often file personal bankruptcy in hopes of obtaining debt relief. While it is true bankruptcy consolidates outstanding debts, new bankruptcy laws require debtors to repay a portion of debts through Chapter 13.
Another reason most bankruptcy plans fail is because bankruptcy lawyers do not provide sufficient wiggle room should debtors encounter unexpected expenses. New bankruptcy laws also prohibit debtors from incurring new debt during the payment plan. If debtors encounter health problems or need a new transmission for their car, they often must choose between immediate needs vs. making bankruptcy payment installments.
The Bankruptcy Abuse Prevention and Consumer Protection Act has made it much more difficult for debtors to file bankruptcy and even harder to adhere to debt repayment plans. Additionally, BAPCPA placed additional stipulations on bankruptcy attorneys and requires them to certify their clients' need to obtain bankruptcy protection.
Under BAPCPA, debtors are required to undergo the 'means' test to determine how much debt is repaid and which bankruptcy chapter is allowable. Prior to BAPCPA most debtors filed for Chapter 7. Known as liquidation bankruptcy, Chapter 7 involves liquidating valuable assets and using proceeds to pay off debts. Remaining balances are written-off and debtors are given a clean slate.
The means test compares the last 6 months of debtors' income against their states' median income levels. Those earning more than median levels must submit a Chapter 13 bankruptcy petition and establish a payment plan. Those earning less may qualify for creditor protection under Chapter 7.
Debtors are required to submit payment plans through the court for approval. Once approved, debtors submit Chapter 13 payments to the U.S. Trustee who disburses payments to creditors until debts are fully paid. Bankruptcy payment plans are usually in place for 2 to 5 years; depending on the level of outstanding debts.
Many people fail to realize that Chapter 13 payments are in addition to normal monthly expenses. On average, 60-percent of disposable income is contributed to meet bankruptcy payment obligations. Those who are struggling to make ends must find ways to slash monthly expenses or find alternative sources of income.
Debtors often must take on a second job to meet financial obligations of Chapter 13 plans. In today's economy, it is very difficult for people to find one stable job, let alone two. Those who are incapable of adhering to the plan will eventually fail out of bankruptcy and lose protection from the court.
When bankruptcy plans fail, debtors are held responsible for outstanding debts. Creditors are allowed to engage in collection action which can range from repossessing items secured by loans, to wage garnishment, and real estate foreclosure.
Debtors cannot file for bankruptcy protection again for 8 years. When debtors own real estate and fail out of bankruptcy they almost always lose their home to foreclosure. Debtors facing foreclosure should investigate bankruptcy alternatives which may allow them to keep their home. These might include: credit counseling, debt consolidation, or debt settlement.
Bankruptcy is governed by the U.S. Department of Justice. The DOJ website publishes a list of approved credit counseling agencies and debt education agencies which may help debtors avoid bankruptcy. Debtors can learn more about BAPCPA and available programs at Justice.gov.
We invite you to browse our bankruptcy article library to obtain additional information and resources. Topics include bankruptcy prevention, new bankruptcy laws, bankruptcy alternatives, and strategies to avoid failing out of bankruptcy.