Personal bankruptcy
Personal Bankruptcy: Chapters 7 and 13 Chapter 7 and Chapter 13 personal bankruptcy. This video was sponsored by Visa, but I had complete editorial freedom as to its contents.
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- [MUSIC PLAYING]
- Ever since people have been lending money to each other,
- there's been one fundamental problem.
- What happens when someone can't pay back their debts?
- What are you going to do?
- And before I really jump into what we do now in our modern
- society, let's get a couple of the I'll words out of the way
- that we're going to use a lot.
- And these are words that you'll hear a lot in the
- context of debt, or in the context of loans.
- So on one side of the transaction,
- you have the debtor.
- And this is essentially the person that
- borrowed the money.
- And because they borrowed the money, they now owe money.
- So you could either say they borrowed the money or that
- they owe money.
- On the other side of the transaction,
- you have the creditor.
- This is the entity, or the person, that is owed the
- money, or they lent the money to the borrower.
- So they lend the money.
- So we have our words out of the way, but let's go back to
- our fundamental question.
- What happens when the debtor can't pay the creditor back
- the money that the creditor is apparently due?
- Well, if we go back through human history, they've come up
- with various solutions to this problem, we can call it.
- If you go back to ancient Greece, they had a very simple
- solution to it.
- If the debtor can't pay back their debts, well then become
- a debt slave to the creditor.
- So they became a debt slave.
- So if the creditor needs some gardening done or would like
- his or her house cleaned more regularly, the debtor-- and
- actually, probably the debtor's family-- would have
- then had to do whatever the creditor wanted until they
- essentially paid back their debt through their labor.
- So that's how Greece handled it.
- It's kind of shocking to us now, but
- that was their solution.
- You decided to borrow money, you can't pay it anymore, this
- is what you've got to do.
- Now if we fast forward a little bit to maybe medieval
- Europe, this is even-- Charles Dickens' father was even
- caught into this kind of a bind.
- But until kind of the early or mid-1800s in Europe and the
- United States you had the notion of debtor's prison.
- And frankly, when I describe this to you, you'll find that
- it's even worse in my mind than being a debt slave. In
- debtor's prison, they would throw you in jail.
- They would imprison you.
- That's why it's called debtor's prison.
- And you're not coming out until your family
- pays off your debt.
- Your family or maybe your friends, if you have good
- friends, pays off your debt.
- Just thinking about why this is especially horrible, at
- least here you had your chance to work off your debt.
- My situation right now.
- You know, if I get thrown in prison will my 10-month-old
- son be able to pay off my debt?
- No, I'm just going to rot in prison forever.
- Or what if my family doesn't like me?
- Or what if I have no family or friends?
- I might have owed someone the equivalent of now of $1,000
- and because of that, I could serve a
- life sentence in prison.
- You can imagine the debtor's prison could be quite harsh.
- And actually, Charles Dickens' dad was in debtor's prison.
- It can kind of tell you a little bit about why he writes
- the type of books that he does.
- But anyway, this is the past. We are now a civilized
- society, and hopefully we have a better way of dealing with
- the situation when a debtor owes a creditor money.
- And that's the topic of this video.
- And so now what we do is something called bankruptcy.
- And just so you know, the first versions of bankruptcy
- weren't that different from debtor's prison.
- They were actually more to protect the creditor than to
- protect the debtor.
- But now we have bankruptcy laws, and for the most part,
- they're to prevent this type of craziness or for someone to
- spend their entire life on kind of
- this wacky debt treadmill.
- So let's talk a little bit about bankruptcy.
- And I'm going to focus on bankruptcy as it is in the
- United States.
- So let me write down bankruptcy in a new color.
- Bankruptcy.
- It's going to have a U.S. focus.
- And in general I'm going to talk about personal
- bankruptcy, although a lot of what I talk about on some
- level, applies to corporations as well.
- And I've actually made videos on that as well.
- So let's say I'm just overwhelmed with debt.
- I have $100,000 of credit card loans.
- I have a mortgage to pay.
- I have a car lease that was a little bit over my head.
- What can I do?
- So there's a couple of options in the United States.
- You have Chapter 7.
- It seems very complicated.
- These are all different-- literally-- chapters of the
- bankruptcy code.
- So you have Chapter 7.
- It is called a straight bankruptcy.
- And this is literally you go-- I mean it's
- not a simple procedure.
- But the gist of it is, you go to the bankruptcy courts.
- You say, look, I can't pay back my debts.
- And so what they're going to do is they're going to take my
- assets and then whatever there is there, they're going to
- split it amongst my creditors.
- And then after all is said and done, I don't owe anyone
- anything, although I've lost a lot of my assets.
- Some of them are exempt.
- They let you keep things that you need to live, like your
- pots and pans and maybe one television.
- And maybe a suit so that you can find a job.
- But if I have a bank account, I probably don't because I got
- so deep into debt.
- But if I have some money, if I have a nice diamond ring or a
- Rolex watch, they're going to take that from me.
- The trustee, the bankruptcy court, is going to take that
- from me, sell it, and then give it to all my creditors.
- But at the end of the day, after all is said and done,
- I'll actually be free of all of my debt.
- It's kind of a way to break from this cycle of always
- owing money and always just barely making it, or probably
- not making it at all.
- So that's a straight bankruptcy.
- And you might say, well, why doesn't everyone do that who's
- under a big, heavy load of debt?
- Well one, there's a lot of rules that make this easier or
- not so easy to do.
- But the other thing is it stays on your credit report
- for 10 years.
- 10 years on credit report.
- So you've got to think to yourself, am I going to be
- better off over the next 10 years continuing
- to pay off my debt?
- If I can pay off my debt, if I have any chance, I should
- probably do that so that I don't ruin my credit for the
- next 10 years.
- But if it's just a hopeless situation, I
- might as well do it.
- And just so you know.
- This isn't a cure for everything.
- If you're sitting on $300,000 of student loans, I say, wow,
- that's going to take me more than 10 years to pay anyway.
- Let me just declare Chapter 7 bankruptcy.
- It'll be unfortunate to find out that student loans are
- not-- cannot be forgiven in a Chapter 7 bankruptcy.
- So there's a whole set of a types of loans, or I guess you
- could say, types of liabilities, things you owe to
- other people that cannot be forgiven.
- Certain types of taxes, student loans, child support,
- those won't be forgiven.
- This will definitely apply to things maybe
- like credit card loans.
- But this isn't just a very, very simple process.
- So any of these things that I talk about, you definitely
- want to consult an expert on your kind of particular
- situation to get a little bit more detail.
- But this is just an overview.
- So that's Chapter 7, straight up bankruptcy.
- I don't have what it takes to keep servicing my debt.
- I want a brand new start.
- Now, the next one or the next one that you're going to be
- most-- going to hear the most about in the context of a
- personal bankruptcy-- is Chapter 13.
- And this is often referred to as a reorganization.
- And here the idea is, look, I have a salary.
- I have a job.
- But I just have more debt than is imaginable.
- And it might not be just because I've been
- irresponsible.
- Maybe a medical emergency came up in the family or I had some
- unknown expenses that just popped up out of nowhere.
- And so here the situation is, look, Mr. Creditors out there,
- I really do want to pay you back, but what you're asking
- for me to do right now is just crazy.
- If you ask me to do that I'm just going to end up in
- Chapter 7 eventually.
- So for both my sake-- me as the debtor-- both for my sake
- and for your sake, why don't we come up with a plan so that
- I can realistically pay you over the next
- three to five years?
- And that might involve you saying, hey, instead of being
- owed $50,000, you now owe me $40,000.
- Or instead of the interest on my credit card being 20% per
- year, let's change that to 10% per year.
- So they'll be a little bit of a negotiation.
- You're going to have to come up with a plan.
- And then once you come up with that plan, I've got to pay
- that over the next three to five years.
- Now once again, you might say, hey, well that's pretty good.
- If I owe $100,000 in credit card debt and I kind of go to
- my creditors and look like a genuine individual and make a
- nice sob story, they're going to lower my debt.
- I'll be better off than if I didn't do it.
- But here again, there's a penalty to doing it.
- And once again, it shows up on your credit report.
- And so, in general, they're going to come up with a plan
- for you to pay back your creditors over three years.
- And then after that, it's going to show up on your
- credit report for another 7 years.
- So in general, from the time you file until the time it
- leaves your credit report is going to be 10 years, just
- like Chapter 7.
- So in either of these situations, these aren't
- things that you want to just jump into and then think, wow,
- I found an easy out from my debt.
- These are very serious things that will impact you for a
- reasonable chunk of your life.
- So these aren't just simple things to do.
- But they are good to know about just in case you do find
- yourself a little bit over your head or a little bit
- under water, or you know someone
- who's in this situation.
- At least it is an out where they can feel that look, if I
- do this or that, maybe over the next either 3 years or 10
- years-- depending on how you view it-- they can
- get to a new start.
- And just so you have a sense of how often this occurs, I
- looked this up a little bit earlier.
- In the U.S., and as you can imagine, we're in the middle
- of a recession now, so bankruptcy filings are kind of
- going through the roof.
- So let me write this down.
- So this is Chapter 7.
- And here's Chapter 13.
- And if you're wondering, what are all
- the chapters in between?
- There's a Chapter 12, which is essentially Chapter 13 for
- farmers and fishermen.
- They get a few more benefits than the rest of us get
- because we want to promote, I guess,
- people who produce food.
- And then there's Chapter 11, which is essentially business
- reorganization.
- It can apply to some individuals who are
- essentially kind of big shots.
- Their personal portfolios of assets and liabilities look a
- lot like a business.
- So for them Chapter 11 will be more appropriate
- than Chapter 13.
- So those are kind of the two other chapters.
- But from a personal bankruptcy point of view, Chapter 7 and
- Chapter 13 is what most people concern themselves with.
- Now, just to give you the numbers of how often this is
- occurring, if you find yourself in the circumstance,
- just so you know you're not necessarily alone.
- And also just to see that they really are
- increasing right now.
- So 2007, 2008, 2009.
- So Chapter 7 filings in the United
- States in 2007: 413,000.
- In 2008 it went up to 560,000.
- So this is more than a 25% increase.
- And then in 2009, 819,000 filings.
- Essentially double of the number of Chapter
- 7 filings in 2007.
- And if you look at Chapter 13, in 2007
- we had 277,000 filings.
- So for every two Chapter 7's it looks like there's about--
- well, for every four there's about three of these.
- Then we have 334,000 in 2008.
- And then 370,000 in 2009.
- So you can see that the Chapter 7 ones, I mean they're
- both increasing really fast. But Chapter 7
- is even more dramatic.
- And you could imagine because in a situation where people
- don't have jobs, Chapter 13 really isn't that
- viable of an option.
- They really have to do something like Chapter 7.
- Anyway, hopefully you found that useful and you know a
- little bit about bankruptcy now.
- [MUSIC PLAYING]
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