In America we have a long and revered history of allowing people to re-invent themselves. Beginning with the founding fathers — and mothers — who built a new country from nothing, Americans, more than any other people, believe everyone deserves a second chance.
When the Constitution was drafted, this American trait of forgiving one’s past mistakes was incorporated under Article I, § 8, ¶ [4], which provides that Congress shall have the power “To establish … uniform Laws on the subject of Bankruptcies throughout the United States.” What that means is that bankruptcy, the right to start over, is guaranteed to us as citizens.
It also means, however, that Congress can make the rules on bankruptcy — when you can do it, how often, what you can get relief for and what you can’t. As part of the rule making that Congress has done, they have created different categories for bankruptcy. For consumers, there are two main chapters of bankruptcy: Chapter 7, which when a person says to their creditors (such as Visa, Mastercard, Ford Motor company) that they cannot pay the money owed, and they are asking the court to relieve them of the debt.
Chapter 7 provides IMMEDIATE relief to the debtor from the moment they file with the court. Additionally, it means that a person gets relief from most of their debts. Some debts are not dischargeable, which means the debtor will still owe the money. Examples are the IRS and state taxes, student loans and certain judgments arising from fraud.
In a Chapter 7 filing, the debtor can keep a large amount of their assets. The code allows for a person to keep their clothing and personal items for the most part, as well as their home, if they can keep paying on it; their car, if they can keep paying on it, and tools and equipment for their business.
The effect of a Chapter 7 is that it stays on the debtor’s credit report for 10 years and can be used as a basis for denial of credit or increased fees for borrowing money.
There also is Chapter 13, which is a repayment plan. This is very good for some people who have a regular paying job that they are secure in and are willing to live on a strict budget for three years.
In a Chapter 13, the debtor agrees to repay their creditors, who accept less than are they fully owed, over a three-year period. The catch is that the debtor must have a regular paycheck, live on a very strict budget and runs the risk of having their Chapter 13 converted to a chapter 7 if they miss one, JUST ONE, payment to the trustee, who is paying the creditors on the debtor’s behalf.
The benefit to the debtor in a Chapter 13 is that they have repaid their debt, which makes it much more likely that they are going to be able to re-establish their credit with other banking institutions quicker.
Filing a general Chapter 7 should cost $750 to $1,000 for a basic consumer credit discharge, but it can certainly be more or less, depending on the complexity of the case. A Chapter 13 will cost about $2,000, again depending on the complexity of the case.
If you think that a bankruptcy will destroy your life, just remember that Henry Ford had to file for bankruptcy at the Detroit Automobile Company, prior to founding what is now known as Ford Motor Company.
Not bad for a second chance. (David Pisarra is a partner in the Santa Monica law firm of Pisarra & Grist. He via e-mail at)
Originally published in the Santa Monica Daily Press print edition on February 3, 2003. Read the original PDF.