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Reflect on Learning: When a debtor is discharged from a Chapter 7 bankruptcy, they are left with the things they need to to live and work, but their lifestyle takes a real downgrade. Can you list properties that cannot be sold by the trustee? Answer: Necessary clothes and household furnishings, some jewelry, appliances, retirement savings, some home equity, tools for business. Hopefully, you will never experience bankruptcy as either a creditor or a debtor, but can you see how bankruptcy is important to both debtors and creditors as a tool for preserving and protecting wealth?
V. Bankruptcy’s Limitations and Alternatives
Limitations to Bankruptcy Bankruptcy has limitations. There are restrictions on what bankruptcy enables a debtor to do, particularly in Chapter 7. Can’t Abuse the System. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) is designed to stop consumer creditors from taking advantage of bankruptcy laws. Under BAPCPA, if the debtor’s income is above a certain amount, they are not eligible for Chapter 7. Instead, they are redirected to Chapter 13 to create a repayment plan. Also, BAPCPA makes it impossible to file for Chapter 7 bankruptcy more than once every eight years . If a debtor files for Chapter 7 bankruptcy and then goes bankrupt again less than eight years later, they will be put into Chapter 13 where they will be required to make a plan to repay creditors. Won’t Discharge Co-Debtor. A discharge of a debt releases only the debtor in the bankruptcy proceeding from liability for repayment. Unless they file their own bankruptcy, co-signers, co-borrowers and guarantors remain on the hook for repayment . This is another reason why becoming a co-debtor can be financially risky. Won’t Fix a Credit Score. By the time most debtors file for bankruptcy, they have already defaulted on loans or credit card payments. While bankruptcy provides them with a fresh financial start, the bankruptcy case stays on their credit report for at least seven years . Filing bankruptcy will not fix a damaged credit score, although on the bright side, many creditors see it as an indication that the debtor has taken positive steps to get their financial problems under control. Alternatives to Bankruptcy Credit Counseling. Regardless of the ultimate benefits, bankruptcy is a sad and difficult process. Many people are emotionally traumatized if they have to file bankruptcy because they consider it a major life failure. The decision to file bankruptcy should be made after careful contemplation and after consulting experts, including an accountant, an attorney, and a qualified credit counselor. Credit counselors are certified and trained in consumer credit, money and debt management, and budgeting. A good credit counselor can help a debtor PRODUCT PREVIEW Boom and Bust About 70 percent of people who win a lottery or get a big windfall actually end up broke in a few years. Nearly a third of lottery winners later declare bankruptcy. National Endowment for Financial Education. Fin Lit Trivia Fin Lit Trivia Fin Lit Trivia
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 357
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