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Video transcript

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 can't pay back what are you gonna do and 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 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 borrowed money and because they borrow the money they now owe money so you can either say they borrowed the money or that they owe money they owe the money on the other side of the transaction you have the creditor 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 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 you know if we go back through the through through human history they've come up with rent you know various solutions to this to this problem we can call it if you go back to ancient Greece ancient Greece they had a very simple solution to it the debtor if the debtor can't pay back their debts will 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 debtors family would have then had to do whatever the creditor wanted until they essentially pay back their debt through their labor so that's how Greece Handel did it you know it's kind of shocking to us now but that was your solution you decided to borrow money you can't paint anymore this is what you got to do now if we if we fast-forward a little bit to maybe medieval Europe and this is you know this is even Charles Dickens father was even a caught into this into this kind of a bind but until kind of the early or mid 1800s in Europe in the United States you had the notion of debtors prison debtors prison and frankly I you know when I described this to you you'll find that's even worse in my mind and being a debt slave in debtors prison they would throw you in jail so they would throw you they would imprison you and that's what's called debtors prison and you're not coming out until your family pays off your debt your family or your maybe your friends if you have good friends pays off your debt off your debt and I'm you know 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 you know if my situation right now you know if I get thrown in prison will my ten month old son be able to pay off my debt no I'm just gonna rot in prison forever or what if my family doesn't like me or what if I have no family or friends just for you know I might have owed someone the equivalent of now of a thousand bucks and because of that I could serve a life sentence in prison so you could imagine that debtors prison could be could be quite harsh and actually Charles Dickens dad was in debtors prison so it's it's a 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 debtors prison there are 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 a 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 bankruptcy it's going to have a us focus and in gentleman 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 you know a hundred thousand dollars 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 comforted these are all different literally chapters of the Bankruptcy Code so you have chapter 7 it's called a straight bankruptcy and this is literally you go you 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 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 your pots and pans and maybe one television and it may be 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 they're gonna 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 so you can you 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 you know under under a big heavy load of debt well one there's a lot of rules that make this easier not so easy to do but the other thing is it stays on your credit report for ten years ten years on credit report so you got to think to yourself am I going to be better off over the next ten years continuing to pay off my debt if I can pay off my debt any chance I should probably do that so that I don't ruin my credit for the next ten 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've got you know if you're sitting on $300,000 of student loans I say wow you know let me just that's gonna 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 and so 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 tax taxes student loans child support those won't be forgiven so this you know 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 talked 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 you're going to hear the most about about in the context of a personal bankruptcy is chapter 13 chapter 13 this is often referred to as a reorganization reorganization and here's the ideas look I have a salary I have a job but I just have more debt than isn't 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 mister 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 if you ask me to do that I'm just going to end up in Chapter seven eventually so for both my sake for me is the me is 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 I can realistically pay you over the next three to five years and that might involve you saying hey instead of instead of being owed 50 thousand you now owe me 40 thousand instead of the interest on my credit card being 20% per year let's change that to 10 percent a year so there'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 three to five years now once again you might say well that's pretty good you know if I owe $100,000 in credit card debt and you know and I kind of go over to my creditors and and make them that you know and 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 you know there's a penalty to doing it and and once again it shows up on your credit report and so in general you're going to 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 seven years seven years on credit on your credit report so in general from the time you file until the time it leaves your credit reports going to be ten years just like just like chapter seven so in either of these situations these aren't things that you want to just jump into and think wow I found it easy out from my debt these are very serious things that will impact you for a you know a reasonable chunk of 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 underwater or you know someone who's in this situation at least it is and out where they can feel that look if I do this or that maybe over the next either three years or ten 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 look this up a little bit earlier in the u.s. in the US 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 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 than the rest of us get just 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 who you know 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 that those are kind of the two other chapters but from a personal bankruptcy point of view chapter 7 in chapter 13 or what is what most people concern themselves with now just to give you the numbers of how often this is occurring just you know if you find yourself in this circumstance you just said 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 thousand and 2008 went up to 560 thousand so this is a more than a 25 percent increase and then in 2009 eight hundred and nineteen thousand filings essentially double of the month the number of chapter 7 filings in 2007 and if you look at chapter 13 in 2007 we had two hundred and seventy seven thousand filings so for every two chapter 7s there looks like there's about well for every four there's about three of these then we have three hundred and thirty-four thousand and two thousand eight and then three hundred and seventy thousand in 2009 so you can see that the chapter seven ones I mean they're both increasing really fast but chapter seven is even more dramatic and 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