More and more people in the US are over-indebted. The only way out is often declaring personal bankruptcy. This usually lasts six years. But there is also the option of shortening it to just three years under certain circumstances. How does this work? What requirements do you have to meet?
If you can no longer pay your debts and if the creditors do not agree to a settlement, you will find your last resort in personal bankruptcy. The process usually takes six years. During this time, the debtor has to give up a large part of his income. Under certain circumstances, the bailiff can also seize the goods. In this phase, the debtor is obliged to pay off his liabilities as best he can. At the end there is then the discharge of the remaining debt. All outstanding debts will then be canceled.
It goes without saying that these six years are not a pleasant time. But it is a means to save your own economic existence and to be able to dare a new beginning. There has also been an option since mid-2014 to cut the so-called good conduct phase by half. It then only lasts three years.
But for that you have to really work hard. If you want to get the remaining debt discharge after three years, you have to pay the entire costs of the ongoing bankruptcy proceedings and more than a third (35%) of the outstanding liabilities. In such a case, chapter 7 bankruptcy assists as a guideline. For the unemployed and low-wage earners, this shortened personal bankruptcy is almost never an option. And of course the total amount of debt also plays a role.
The credit agency has examined the success of the reform. Of almost 50,000 people who went into personal bankruptcy in the second half of 2014, i.e. after the reform came into force, a little more than 4,000 people managed to clear their residual debt after three years. That is 8.3 percent. At first glance, that doesn’t sound like much. In fact, however, the reform can be seen as a success. Because it apparently motivates many of those affected to get out of the debt trap more quickly. The regulation also seems to be acceptable for the creditors – because many go empty-handed in their debtors’ bankruptcy proceedings. The 35 percent rule now mitigates this in almost a tenth of the cases.
It is mainly young people who succeed in shortening it. This may be due to the fact that the debts of young people are comparatively low and they also have more opportunities to service the creditors with their own income. “Across all age groups, the average debt of those affected is around 33,500 dollars. However, the value is much lower for those under 30. Here the average debt amount is just under 15,000 dollars. With increasing age, the debts increase to an average of 43,000 dollars for American citizens in the age group 61 years and older,”says credit agency.
In addition, there is a problem that all private bankruptcies have: they not only have to serve their creditors, but also bear the procedural costs. This includes the court costs, the bankruptcy advisor’s fee (usually a lawyer) and the fees charged by the trustee. The payments to repay debt are not made directly to the creditors, but rather go through a trustee who manages the funds. And the trustees receive a sometimes substantial share. They are the ones who often get the best business because, unlike debtors and creditors, they don’t run the risk of losing money in the end.
The advantage of the shortened insolvency is therefore also obvious: the lawyers and trustees only have to be paid for three and not six years of work. For debtors, this can be an additional motivation to make an effort in the conduct of business phase. Because the more money you earn, the sooner it is possible that your full salary will end up in your own account again, and no longer on that of the trustee.
The main causes of over-indebtedness are therefore “unemployment and reduced work, income poverty, failed self-employment, consumer behavior that does not match income, changes in the family situation such as divorce or separation and illness.”
A total of around 650,000 people in the US are currently in private bankruptcy. That sounds like a lot. In fact, however, the number of personal bankruptcies has been falling continuously in recent years. While around 140,000 personal bankruptcies were registered in 2010, the number is now well below 100,000. For the current year 2019, the experts expect only 88,000 new personal bankruptcies.
Going bankrupt is a tough decision. Often you have tried everything possible beforehand, but the debt is still rampant. A last option to avert the bankruptcy and the insolvency proceedings that can last up to six years is the out-of-court settlement. Whether it works depends not least on the level of liabilities and the benevolence of the creditors.
Whether the creditors agree to the settlement depends not least on the amount of their claims and the debtor’s situation. The most important question is how high the prospect is that the debtor will generate enough money in the course of the bankruptcy proceedings to be able to pay off a large part of the debt. According to the law, he is obliged to take care of his debt relief. Anyone who is unemployed at the time of filing for bankruptcy is required to look for work quickly. Any money that he generates over and above the seizure allowance goes to the creditors.
However, if the debtor is a pensioner, is ill or is about to retire, or is unable to work, or only to a limited extent, for other reasons, the chances of repayment are very poor. In such cases, comparisons are promising, as the creditors can receive at least part of their outstanding debts in this way, while in the worst case they could end up completely empty-handed in insolvency proceedings. Under certain circumstances, this can even threaten the very existence of the respective creditor.
A settlement can also be carried out during the ongoing bankruptcy. The prerequisite is the consent of the competent court. If, for example, the debtor sees the possibility of settling a substantial part of his debts after one year, a settlement can lead to an early discharge of the remaining debt and thus the end of the procedure. As a rule, a comparison is the best and fastest solution for all sides. The catch: the settlement amount cannot be paid off, but has to be made in a one-off payment.