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Oscar Dominguez: Advantages, disadvantages of declaring bankruptcy

Posted: July 10, 2009 4:35 p.m.
Updated: July 11, 2009 4:55 a.m.
 
During these uncertain economic times, individuals with significant debt may be asking themselves if declaring bankruptcy may be the solution.

For some, the decision may not be voluntary if creditors choose to seek compensation through the bankruptcy courts.

U.S. consumer bankruptcy filings increased 36 percent nationwide in April 2009 from the same period a year earlier, according to the American Bankruptcy Institute (ABI), based on data from the National Bankruptcy Research Center (NBKRC).

ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency.

The NBKRC is an online research center that offers subscribers access to up-to-date research and statistics on bankruptcy filings.

When deciding if bankruptcy is the best option for you and determining eligibility requirements, it may be wise to consult an experienced bankruptcy attorney. According to the U.S. Courts Web site, most bankruptcy cases are filed under chapters 7, 11 or 13 of Title 11 of the United States Code, also known as the Bankruptcy Code.

In a chapter 7 (liquidation) filing by an eligible individual or business, a trustee is appointed by the bankruptcy court to administer the bankruptcy estate.

The trustee oversees the sale of assets that are not exempt to pay off creditors. Debtors should be aware that they may incur loss of property when filing under chapter 7.

To be eligible to file chapter 7, a "means test" must be applied to determine if the debtor meets certain income criteria to qualify, according to the U.S. Courts Web site.

A chapter 11 bankruptcy is typically a filing for reorganization by a corporation or partnership to continue business operations and develop a plan to repay creditors.

Individuals or people in business can also seek to file bankruptcy under chapter 11, according to the U.S. Courts Web site.

A chapter 13 bankruptcy filing allows individual debtors with regular income to reorganize their finances and pay creditors under the supervision of a bankruptcy court. Sole proprietorships may also be eligible to file bankruptcy under chapter 13.

A debtor filing for chapter 13 bankruptcy will follow a plan to pay creditors within three to five years. In addition, filing chapter 13 provides debtors the opportunity to stop the foreclosure of their home, according to the U.S. Courts Web site.

When considering the option of bankruptcy, consider the advantages and disadvantages provided by the American Bar Association Division for Public Education Web site:

Advantages:
n A new beginning. Those who are eligible for chapter 7 may be forgiven most unsecured debts (debts not secured by collateral) and can start anew financially.
n Stops most collection attempts. When you file a petition for bankruptcy under chapter 7 or 13, an "automatic stay" is activated to disallow the continuation of most collection efforts.

Disadvantages:
n Credit. A bankruptcy will remain on your credit report for up to 10 years.
n Finances. Having a bankruptcy on record may negatively affect your future finances. For example, a bankruptcy may result in a higher percentage rate on a bank card or you may be asked to provide a card deposit with a credit card issuer.

The above is not legal advice and you should contact a licensed attorney to determine the best course of action for your specific circumstances.

Oscar Dominguez is vice president and branch manager of the Stevenson Ranch branch of Union Bank and the Valencia Bank & Trust branch. His column reflects his own views and not necessarily those of The Signal.

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