Bankruptcy for the Motor City
On July 18, 2013 Detroit, Michigan became the largest American city ever to file for bankruptcy. Its long-term debts are estimated at $18.2 billion, or $27,000 for each resident. The City filed what is known as a Chapter 9, or municipal bankruptcy. The filing is being seen as the best option for the city to help them rebuild, restructure, and regain control of its finances. Many speculate that Detroit will sell assets like treasured pieces of art to pay down debts. How can the bankruptcy Detroit filed relate to you and your decision to file bankruptcy? Simple: the ultimate goal is the same, to eliminate the debt that is holding you (and Detroit) captive from a strong financial future.
Although individuals are not eligible to file the same type of bankruptcy that Detroit filed, there are 2 distinct types available to them: Chapter 7 and Chapter 13 bankruptcy. The municipal bankruptcy that Detroit is going through is most similar to a personal Chapter 13 bankruptcy because it involves a reorganization and restructuring of debts in order to efficiently pay them back. For individuals or families who choose to file a Chapter 13 bankruptcy they will be given a 3-5 year repayment plan in which the court will order them to payback a certain percentage of their overall unsecured debt. The percentage that the court orders individuals to pay back in a Chapter 13 bankruptcy varies due to the debtor’s monthly income and expenses, but it can range from 10-100%. At the end of the 3-5 year plan the debtor will be debt free and up to date on all secured monthly payments such as a car note or a mortgage.
Chapter 13 bankruptcies are typically beneficially to individuals or couples that have large amounts of secured debt or debt that is tied to a specific object such as a car, home, or loan. Excess money or a substantial “disposable income” is also a requirement for a Chapter 13 case because the debtor(s) must have money to make their monthly bankruptcy payment for 3-5 years.
The other type of personal bankruptcy is one that Detroit probably wishes it had the opportunity to file because it is known for completely eliminating debt and giving the debtor a “fresh start.” This type of bankruptcy is called Chapter 7 and it is the most commonly filed Chapter in America. If the debtor meets the eligibility requirements the court will grant them a discharge of debts which will wipe away unsecured debts such as credit card debt, medical bills, utility bills, and even types of personal loans.
As you can see, the common theme of all bankruptcies, whether they are on a large scale like Detroit’s or a small scale like yours or someone you know, is to eliminate debt. Contact a local attorney in your area if you think that a Chapter 7 or 13 bankruptcy could be a help to you and your finances.