Consumer Debt Protection
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Many individuals seek consumer debt protection when expenses far outweigh income and an ability to pay. When families have more month than money, many turn to bankruptcy as a means of relieving the pain of crushing debt. However, bankruptcy is usually not a pain-free solution. Whether debtors choose to file Chapter 7, 11 or 13 petitions for consumer debt protection, the repercussions mainly include banishment for 7 to 10 years from a reputation for creditworthiness. Bankruptcy severely damages credit reports; and lenders tend to feed bankrupt borrowers with a long handled spoon. Some won't even consider loaning money to individuals who have previously filed or are in the process of working out repayment or wage earner plans under Chapter 7 and 13 filings. Since the chances of getting financed for a home, car or student loan are nearly nil after filing, financial consultants advise debtors to refrain from taking such drastic measures until exhausting other alternative means of debt resolution.
Before filing for consumer debt protection under the U.S. Bankruptcy code, individuals and businesses should count up the costs. A consumer credit report blighted with bankruptcy is not only a constant reminder of financial failure, but a strike against those seeking financing for personal or business ventures. Some banks are even leery of opening checking accounts for individuals with poor credit histories. Fortunately, there are alternatives to plunging into financial abyss. Consumer credit counselors approved by the federal government can help individuals and entrepreneurs develop repayment plans and establish personal and business budgets to help alleviate the strain of indebtedness. Sometimes, it just takes the advice of a wise financial counselor to help consumers envision a ray of hope in the midst of gloomy money woes. "Where no counsel is, the people fall: but in the multitude of counsellors there is safety" (Proverbs 11:14).
Cases for consumer debt protection are administered through a local branch of the U.S. Federal Bankruptcy court. Before declaring insolvency, individuals need to know which petition best suits particular financial situations and the relief and repercussions relevant to each case. The federal government requires debtors considering bankruptcy to submit a certificate of completion for credit counseling through a court-approved agency within six months prior to filing. The purpose of credit counseling is to not only enable individuals to make an informed decision about whether or not to file, but also to provide education on filing requirements and regulations governing proceedings. A chapter 7 case is essentially an asset liquidation plan which requires debtors to submit documentation of income, including federal and state tax returns; listings of assets and liabilities; expenses and outstanding debts, such as mortgages, car loans, or other installment agreements; and information on property owned or leased. Filers also need to give the court an idea about how often they are paid and monthly living expenses for food, housing, transportation, healthcare, and utilities. In essence, the federal court takes control of the debtor's personal finances to ensure that creditor claims are met while individuals maintain a reasonable lifestyle.
Once debtors file a chapter 7 petition, a court-appointed trustee sells debtor assets to accumulate funds to settle creditor claims. Secured creditor accounts, loans that are backed by collateral, take precedence over those that are unsecured, such as credit card debt; and the order of repayment is at the discretion of the court. During the course of the consumer debt protection process, all creditor collection efforts must cease and any communication between creditors and the debtor is handled through the trustee. Harassing phone calls and threatening letters stop as the trustee helps sort through years of indebtedness to begin repaying creditors. Debtors who may not have assets for a liquidation case may opt to file chapter 13 consumer debt protection. Known as "wage earner" bankruptcy, a chapter 13 filing establishes creditor payments based on a debtor's regular income as an employee. Filers under this section of the U.S. Bankruptcy law are also required to submit certification of completion of credit counseling through a court-approved agency. During credit counseling, debtors may be able to develop a repayment plan which demonstrates to the court an ability to settle creditor claims in regular monthly increments. Debtors also must submit income earning statements, tax returns, and projections for an increase in income or expenses once the case is filed.
Included in the arsenal of debt resolution petitions is also the chapter 11 asset protection case, which reorganizes or restructures debtor obligations to help consumers with outstanding delinquent accounts settle creditor claims. The greatest difference from either of the other two types of consumer debt protection is that chapter 11 cases are either filed voluntarily by debtors or involuntarily by creditors, under certain federally-mandated requirements. Under chapter 11, creditors who have a substantial investment or claim against a business owner actually petition the court to take over the management of a cash-poor enterprise to recoup monies. Businesses which boast placards advertising "Under New Management" may very well be undergoing bankruptcy proceedings while creditors assume the role of owner/operators. Under the direction and oversight of court-appointed trustees, creditors come in and go over a failing enterprise's accounts to work with trustees in restructuring the operation for greater profitability. Debtor/owners may remain onsite, but lose the authority to manage the operation. However, the benefit is that a business undergoing chapter 11 consumer debt protection proceeding may recover and become more profitable under new management, which is an asset to all concerned.
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