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Understanding bankruptcy crucial before filing

  • Published
  • By Joint Base McGuire-Dix-Lakehurst Legal Office
JOINT BASE MCGUIRE-DIX-LAKEHURST, N.J. --  Bankruptcy. The word conjures up intense and often erroneous beliefs. While some believe it spells their financial end and turns one into credit poison, others mistakenly believe it is an easy way to avoid paying their debts. Neither is completely accurate.

Bankruptcy is a procedure wherein debts are reduced or eliminated when it is impossible for the debtor to fulfill financial obligations. The purpose of bankruptcy is to give the debtor a fresh start. Congress, in establishing one set of bankruptcy rules for the entire nation, has created federal bankruptcy courts in each state with bankruptcy judges appointed by the President.

For individuals, there are two types of bankruptcy actions. The first is called Chapter 7 or straight bankruptcy. Under these provisions, the court takes most of the debtor's property, sells it, divides the proceeds among the creditors and discharges the remaining debt. This is an extreme route to follow as some debtors could pay their debts if given more time to do so. Chapter 13, the second action, is for these people. This is sometimes called the Wage Earner Plan and allows the court to establish a realistic repayment schedule giving the debtor more time to repay debts. Under Chapter 13, the debtor's income is assigned to a trustee who provides the debtor with funds adequate for subsistence and distributes the remainder to creditors according to the court's plan.

Once a petition for bankruptcy is filed, all creditors are automatically prohibited from attempting further collection efforts without the permission of the bankruptcy court. The court has broad powers to prevent harassment by creditors.

Bankruptcy, is not an easy way to avoid paying your debts; rather it is a final resort. Under Chapter 7, debtors lose most of their property. Even under Chapter 13, life becomes a no-frills experience since most of the debtor's income is assigned to creditors. In addition, bankruptcy makes it difficult, though not impossible, to obtain credit and may remain on credit records for as long 10 years.

Bankruptcy doesn't necessarily affect security clearances. The debtor's commander decides whether or not it is appropriate to restrict or withdraw access to classified information based on the debtor's financial circumstances. As bankruptcy provides debtor relief, anyone who files for bankruptcy may be less of a risk than one trying to keep his financial problems hidden.

Some debts including taxes, child support, alimony and student loans guaranteed by a government entity cannot be discharged by the bankruptcy court.

It is wise to discuss financial problems with financial counselors or the legal office. For more information regarding bankruptcy, or to make a counseling appointment, call the base legal office at 754-2010. This article is for informational purposes and does not constitute legal advice or counsel.