Personal bankruptcy: Chapters 7 and 13

Narrator: Ever since people have been lending money to each other there has been one fundamental problem. What happens when someone can't pay back their debts? (writing) Can't pay back. What are you going to do? Before I really jump into what we do now in our modern society, let's get a couple of the words out of the way we're going to use a lot. These are words that you'll hear a lot in the context of debt or in the context of loans. On one side of the transaction you have the debtor. This is essentially the person that borrowed the money. (writing) Borrowed money. And because they borrowed the money, they now owe money, so you can either say they borrowed the money or that they owe money. (writing) They owe the money. On the other side of the transaction you have the creditor. (writing) creditor. This is the entity or the person that is owed the money or they lent the money to the borrower. (writing) They lend the money. They lend the money. 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 they creditor is apparently due? 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, (writing) Ancient Greece they had a very simple solution to it. The debtor, if the debtor can't pay back their debts well then, become a debt slave to the creditor. (writing) They became a debt slave. If the creditor needs some gardening done, or would like his or her house cleaned more regularly, the debtor and actually probably the debtors family would have then had to do whatever the creditor wanted until they essentially pay back their debt through their labor. That's how Greece handled it, if you know 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 the early or mid 1800s in Europe and the United States you had the notion of debtors prison. (writing) Debtors prison. Frankly, when I describe this to you, you'll find that it's even worse in my mind then being a debt slave. In debtors prison they would throw you in jail, they would throw you ... they would imprison you, that's why it's called debtors prison and you're not coming out until your family pays off your debt. (writing) your family or maybe your friends, if you have good friends, pays off your debt. (writing) off your debt. Just thinking about why this is especially horrible, at least here you had your chance to work off your debt. Here if your family either, in my situation right now, 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, just for ... 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 could imagine the debtors prison could be quite harsh and, actually, Charles Dickens' dad was in debtors prison. It can kind of tell you a little bit about why he writes the type of books that he does. 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. That's the topic of this video. Now what we do is something called bankruptcy. Just so you know, the first versions of bankruptcy weren't that different from debtors prison. They are actually more to protect the creditor then 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. Let's talk a little bit about bankruptcy. I'm going to focus on bankruptcy as it is in the United States. Let me write down bankruptcy in a new color. (writing) Bankruptcy, bankruptcy. It's going to have a U.S. focus. 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. I've actually made videos on that as well. 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? 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. (writing) You have chapter 7. This is called a straight bankruptcy. This is literally you go ... it's not a simple procedure, but the gist of it is you go to the bankruptcy courts and you say look I can't pay back my debts. 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 and 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. That's a straight bankruptcy. I say 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 easy or not so easy to do, but the other thing is it stays on your credit report for 10 years. (writing) 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. Just so you know, this isn't a cure for everything. If you've got ... If you're sitting on $300,000 of student loans, I say, wow, let me just ... that's going to take me more than 10 years to pay anyway, let me just declare Chapter 7 bankruptcy, it will be unfortunate to find out that student loans cannot be forgiven in a Chapter 7 bankruptcy. There's a whole set of 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. 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 particular situation to get a little bit more detail. This is just an overview. 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 you're going to hear the most about in the context of a personal bankruptcy is Chapter 13. (writing) Chapter 13. This is often referred to as a reorganization. (writing) reorganization. Here the idea is, look, I have a salary, I have a job, but I just have more debt then is imaginable. 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. 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, so that I can realistically pay you over the next 3 to 5 years. That might involve you saying, hey instead of being owed $50,000 you now owe me $40,000 or instead of the interest being on my credit card being 20% a year, let's change that to 10% a year, so there will be a little bit of a negotiation. You're going to have to come up with a plan and once you come up with that plan, I've got to pay that over the next 3 to 5 years. (writing) 3 to 5 years. Once again, you might say hey 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 then if I didn't do it. Here again, there's a penalty to doing it and once again it shows up on your credit report. In general, they're going to come up with a plan for you to pay back your creditors over 3 years and then after that it's going to show up on your credit report for another 7 years. (writing) 7 years on credit, on your credit report. So in general from the time you file until the time it leaves your credit report it's going to be 10 years, just like Chapter 7. In either of these situations these aren't things that you want to just jump into and think, wow, I've 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. They are good to know about just in case you do find yourself a little bit over your head, or a little bit underwater 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 then maybe over the next either 3 years or 10 years depending on how you view it, they can get to a new start. Just so you have a sense of how often this occurs, I looked this up a little bit earlier. In the U.S., in the U.S., and as you can imagine we're in the middle of a recession now, so bankruptcy filings are going through the roof, so let me write this down. This is Chapter 7. (writing) Chapter 7 and here's Chapter 13. 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, just because we want to promote, I guess people who produce food. Then there is Chapter 11 which is essentially business reorganization, it can apply to some individuals who are essentially 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. Those are kind of the two other Chapters. 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, just if you find yourself in this circumstance, just so you know that you're not necessarily alone and also just to see that they really are increasing right now. (writing) 2007, 2008, 2009. Chapter 7 filings in the United States in 2007, 413,000, in 2008 it went up to 560,000. This is a more than a 25% increase. Then in 2009 819,000 filings, essentially double of the number of Chapter 7 filings in 2007. If you look at Chapter 13, in 2007 we had 277,000 filings, so for every 2 Chapter 7's there looks like there's about ... well for every 4 there's about 3 of these. Then we have 334,000 in 2008 and then 370,000 in 2009. You can see that the Chapter 7 ones are ... I mean they are both increasing really fast, but Chapter 7 is even more dramatic. You can 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.