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With personal bankruptcies reaching a level not seen since just before the bankruptcy laws were reformed back in 2005, pundits are beginning to point to the reform efforts as an unmitigated failure. The intent of the 2005 reforms was to prevent abuse and to stem the rising tide of bankruptcy filings.

As our economy continues to falter and more people than ever continue to suffer financial devastation, the current bankruptcy laws are being eyed for further reform. Though lawmakers’ immediate focus is stopping the alarming rate of home foreclosures (and altering laws to permit judges to alter some mortgages to keep citizens in their homes) - if they manage to achieve success - their attention will shift to the bankruptcy reform efforts of 2005.

Those critical of the reforms enacted in 2005 are concerned with the difficulty and rising costs associated with personal bankruptcy filings, adding that the reform benefited the financial institutions at the expense of debtors. Further, they believe that there has been a direct correlations between those reforms and the current home foreclosure crisis.

Detractors and supporters of the reforms do agree that the economy relies on consumer spending. Bankruptcy is a tool to help debtors work to regain access to credit in order to contribute to the ailing economy. Obviously, it is necessary to prevent against fraud and abuse, but those efforts have hurt the majority of those suffering who are honest, but have been adversely affected by the economy and, oftentimes, unexpected circumstances on the home-front… usually and unexpected medical situation or job loss.

In the 10-years preceding the bankruptcy reforms of 2005, personal bankruptcies increased dramatically, exceeding a record 2-million filings. After the reforms, filings feel substantially, as was anticipated. Part of that was due to the rush of people to file before the reforms were enacted. However, according to information provided by AACER (Automated Access to Court Electronic Records), last year’s filings jumped over 30% to more than 1-million.  This year, they are expected to hit almost 1.4-million or more.

Prior to the 2005 bankruptcy law reforms, Chapter 7 bankruptcy was the choice for consumers seeking relief.  It allows the debtor to discharge all unsecured debts, including credit card bills.  This would possibly allow a family to pay their mortgage and retain the family home.  However, the main purpose of the reform was to push people to file Chapter 13 bankruptcy which requires a repayment of all or a portion of their debts over several years in accordance with a payment plan.

The problem?  That didn’t really happen.  In 2008, Chapter 7 filings continued to exceed Chapter 13 filings by a significant margin, totaling 76% of all personal filings.  In 2005 that figure was 80% and in 2004 - 72%.  The incomes for those families are virtually identical to those who filed before the reforms.

One of the keys to the reforms of 2005 affected the high-income debtors.  As a result of the reforms, high-income debtors have to undergo a means test , which requires providing copies of their most recent tax returns and several pay stubs in order to prove that their income is what they claim.  The amount of paperwork required is significant and some of it, people aren’t used to retaining.  Additionally, they have to file and substantiate a detailed budget of their expenditures.  If you don’t pass the means test - you can’t file for Chapter 7 bankruptcy.

Adding insult to injury, filing fees are increased due to the complexity and time involved in today’s post-reform process.  Debtors are also required to pay for credit counseling and debtor education courses that are required to complete the process.  This leads to further delays in filing for bankruptcy and oftentimes increases the debt, making the situation worse for both the creditors and debtors alike.  Some legislation being considered would eliminate the means-test requirement for people hit by excessive rates.

Information provided by CardTrak (a credit card research firm) shows that credit card industry profits have soared.   They’ve earned nearly $20-billion from penalty fees in 2008 - and increase of 30% from 2005.  Their pre-tax profits have increased by about the same percentage from 2005 to 2008.

While these bankruptcy reforms helped shield the financial institutions from greater risks, there has been no relief provided over that same period from the credit card companies.  There have been no rollback on credit card fees, grace periods have been pared down, and rates are as aggressive as ever despite a significant drop in the prime rate.  While the punitive rate has remained nearly static at just under 31%, the prime rate has dropped from 7% to 4%, creating what experts have called an unprecedented rate spread.  So, the credit card companies have received significant rewards from the 2005 bankruptcy reforms while the consumer has suffered.

Time will tell what new future potential reforms will do to change things in the interest of helping those truly suffering in today’s difficult economic times while at the same time keeping the clamps down on fraud.

For an ever-increasing number of citizens in this recession, filing for bankruptcy becomes a way of managing the mounting financial crisis, even when it means losing the family home.  It really becomes a matter of survival for faced with this decision.

New legislation proposed in Congress includes provisions that allow bankruptcy judges to cut the principal and interest rates on first-mortgages as well as extend the terms of repayment.  The measure, known as the "The Judicial Mortgage Modification Bill," was approved on March 5th, 2009 by The House of Representatives.  Senate approval is all that stands in the way of making this bill - law.

Still, for too many people, time is of the essence and waiting for this bill to become law is not an option.  They need to obtain relief through the existing bankruptcy system, even though the ability to impact mortgage debt is severely limited - for those trying to keep their homes.  Filing for bankruptcy can delay foreclosure proceedings, but barring a change in circumstances, it is only a matter of time before that process takes hold.

Across the country there has been a 33% rise in personal bankruptcies last year, totaling over 1-million filings, according to the American Bankruptcy Institute . The most common types of personal bankruptcy filings are Chapter 7 and Chapter 13.

Chapter 7 proceedings — virtually wipe out unsecured consumer debt, such as credit card debt, a leading cause of bankruptcy, along with divorce,  unemployment, and medical conditions. Chapter 7 offers mortgage relief only for people who are prepared to surrender their home.

Chapter 13 bankruptcy proceedings, which also can help people reduce, if not totally eliminate, credit card and some other types of debt, - has provisions in place to allow people to get current on overdue mortgage payments.  It does not currently allow for a reduction in principal, interest, or the length of the loan for  first mortgages.  A person will still be required to repay everything.  However, it helps people make up overdue payments, usually over 3- to 5-years, by paying an additional amount with each regular mortgage payment. Please note:  You must  establish, in advance, you have sufficient income to handle such an arrangement.

Consumer advocates like ACORN , are lobbying hard in support of the mortgage relief legislation now before Congress. ACORN claims that banks have not acted reasonably in renegotiating mortgages in the current financial crisis. However, many banks and other financial institutions claim that the legislation would unfairly change mortgage contracts at their expense.  This, at a time when they’re in serious financial trouble of their own.

• Chapter 7 Bankruptcy
• Chapter 11 Bankruptcy
• Chapter 13 Bankruptcy

These terms strike fear in the hearts of worried citizens all over the country as they take the difficult steps of running their home financial figures, figuring out which bills not to pay in today’s economy instead of working on which bills they should pay.  What’s the difference in bankruptcy options?

You are faced with a decision to declare bankruptcy and wonder if what you have always heard and never imagined would happen to you - are they true?  Is it really about being protected?  Will bankruptcy be a "black mark" on my financial history or remain in your "permanent record" forever?  These thoughts which are swirling around in the heads of Americans in numbers we’ve not seen in a very long time can be overwhelming.

Should you file for Chapter 7 Bankruptcy?  As a for instance, if you’re currently unemployed with no source of income, Chapter 7 would be a realistic option unless you have family contributions or other sources of income. If  you’re a homeowner and not willing to surrender the home, preferring instead to maintain current mortgage payments - you would have to have some source of income or other financial assistance to pay them.

What about Chapter 11 Bankruptcy?  This is generally not a personal bankruptcy option. It is a chapter of the United States Bankruptcy Code which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business , whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy.

What is a Chapter 13 Bankruptcy?  Well, this is another personal bankruptcy option.  This is an option whereby the consumer can reorganize their debt load.  The Chapter 13 is based on whatever available income there is in the family.  The process calculates your current monthly income and all of your expenses and what remains can be distributed to your unsecured creditors.

How will bankruptcy affect your future?  Can you survive a bankruptcy?  Should bankruptcy be avoided at all costs?  It is most certainly survivable and a person can emerge from a bankruptcy situation with a fresh start financially.  However, what needs to change is your spending habits.  You have to assess what your needs are and separate them from the things you want.  Want vs. Need.  An honest assessment and preparing to live within your means is of paramount importance in order to come out of a bankruptcy smarter and with a focus of avoiding the mistakes and circumstances which brought you here in the first place.  The key is to learn from your history so that you are not "doomed to repeat it."

Critical Tip: Don’t tap into your retirement fund(s) in order to try to keep your head above water at this critical time.  Retirement funds cannot be seized in a bankruptcy proceeding! Leave them alone so that they may serve their purpose - availability during your retirement years.

It’s beginning to appear that in this time of economic crisis, declaring personal bankruptcy has become a viable option for more people than ever before. As a result, it is losing its historical stigma due, in part, to the reality that we all probably now know more people than ever before who have done so. And we are more understanding.

With unemployment accelerating at a pace not seen in decades while the real estate market continues to flounder, the economy is faced with the reality that today, more people are just relinquishing their homes and other worldly possessions instead of working out a debt repayment plan in bankruptcy courts across the nation.

Several experts in the credit counseling and bankruptcy profession recognize the attitude change as being a byproduct of the current economic conditions. Historically, bankruptcy has been looked-upon as a personal failure.

Chapter 7 bankruptcy filings for individuals are up more than 25% for the first three-quarters of 2008. This, alarmingly, is in comparison than the entirety of the year 2007. (Chapter 7 Bankruptcy liquidates the assets and turns them into cash for creditors.)

Conversely, Chapter 13 bankruptcy filings have plummeted from 42% of all personal bankruptcies in 2006 to a level of 25% through three-quarters of 2008. (Chapter 13 Bankruptcy allows the client to keep the assets through a repayment plan with creditors.)

This increase in Chapter 7 filings comes despite the 2005 change in the federal bankruptcy code in making it harder to qualify for liquidation-style bankruptcy in an effort to encourage Chapter 13 filings, which forgive less debt and require payment plans in most cases.

People have resigned themselves to their own personal reality. This has become a fact of life for many people. In the past, folks had a sense of urgency and a strong desire to do whatever it takes to keep their homes. Today, people are simply walking away… tossing the keys to the home inside… packing up their belongings and telling the mortgage companies, “Come and take it. We’re done here.” Why is that? Quite simply, no matter how much they scrimp, save, and fight - when the sun goes down, they’re still significantly “upside down” on their mortgages.

More people are becoming eligible to file bankruptcy, incomes are sinking, work hours are being cut-back, and too many are simply being laid-off. There are drawbacks to both the consumer and the community. Neighborhoods will be affected negatively for a long time as bankruptcies and foreclosures continue to accelerate with no end in sight.

The decision to file for bankruptcy is a tough one for the homeowner, but a choice millions of Americans are making each day as a result of the collapse of the housing market. While contemplating bankruptcy, the major concern of the homeowner is what happens to the home after filing. However, depending on the choice of filing chapter 7 or 13 bankruptcy, the homeowner can decide the fate of the home.

A chapter 13 bankruptcy allows the homeowner to not loose the home. The chapter 13 bankruptcy will reorganize the homeowner’s debt and create a payment plan. The homeowner will be required to provide a financial plan to maintain the home loan, satisfy the court’s payment plan to meet past due balances and any other financial obligations. If a Chapter 7 bankruptcy is chosen, the home will be relinquished to the titled lender and a foreclosure auction will take place after the bankruptcy is discharged. Oftentimes, homeowners file a bankruptcy to stop a foreclosure and allow more time to weigh financial decisions which will decide their home’s fate.

The majority of foreclosed or bankrupt homeowners eventually buy another home after their financial ordeal is long behind them. However, a re-establishment of a financial profile must be planned and properly managed before homeownership is to be re-considered. By rebuilding a credit profile the bankrupt homeowner is evidencing financial responsibility, creditworthiness and increasing the likelihood of purchasing another home sooner rather than later. A substantial savings should be accumulated, as buying a home after bankruptcy may require a larger cash down payment. FHA offers low down-payment mortgage loans and will finance the purchase of a home by a chapter 7 filer in as little as 3 years. In addition, a chapter 13 bankruptcy filer can refinance their existing home out of bankruptcy, as long as there is enough equity in the home to pay the bankruptcy claim. Some private mortgage companies will finance home loans after bankruptcy is filed as long as the borrower can prove to be financially able to afford the mortgage and maintain cash reserves. Anyone considering buying a home after bankruptcy should be mindful that a sizable down payment and higher than market interest rates may be a requirement of the home mortgage.

Bankruptcy can offer the homeowner a way to keep their home when a foreclosure is threatening or allow a homeowner to walk away from their home and gain a fresh financial start. Congress is considering changes to bankruptcy laws to allow the bankruptcy judge to re-write the mortgage terms to meet the present value of the home and the homeowner’s ability to pay for housing. However, the decision to file for bankruptcy should be based on the homeowner’s honest ability to sustain all financial responsibilities and not with the emotional attachment to property.