Narrator: Ever since
people have been lending money to each other there has been one fundamental problem. What happens when someone can’t pay back their debts? (writing) Can’t pay back. What are you going to do? 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
we’re going to use a lot. These are words that you’ll hear a lot in the context of debt or
in the context of loans. On one side of the transaction
you have the debtor. This is essentially the person that borrowed the money. (writing) Borrowed money. And because they borrowed the money, they now owe money, so you can either say they borrowed the money
or that they owe money. (writing) They owe the money. On the other side of the transaction you have the creditor. (writing) creditor. This is the entity or
the person that is owed the money or they lent
the money to the borrower. (writing) They lend the money. They lend the money. 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 they creditor is apparently due? If we go back through human history they’ve come up with various solutions to this problem, we can call it. If you go back to ancient Greece, (writing) Ancient Greece they had a very simple solution to it. The debtor, if the debtor
can’t pay back their debts well then, become a debt
slave to the creditor. (writing) They became a debt slave. 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. That’s how Greece handled it, if you know it’s kind of shocking to us now, but that was their solution. You decided to borrow
money, you can’t pay it anymore, this is what you’ve got to do. Now, if we fast forward a little bit to maybe Medieval Europe, this is even Charles Dickens’ father
was even caught into this kind of a bind, but until
the early or mid 1800s in Europe and the United
States you had the notion of debtors prison. (writing) Debtors prison. Frankly, when I describe this to you, you’ll find that it’s
even worse in my mind then being a debt slave. In debtors prison they
would throw you in jail, they would throw you …
they would imprison you, that’s why it’s called debtors prison and you’re not coming
out until your family pays off your debt. (writing) your family
or maybe your friends, if you have good friends,
pays off your debt. (writing) off your debt. 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,
in my situation right now, if I get thrown in prison
will my 10-month-old son be able to pay off my debt? No, I’m just going to
rot in prison forever or what if my family doesn’t like me or what if I have no family or friends, just for … I might have owed someone the equivalent of now of
$1,000 and because of that I could serve a life sentence in prison. You could imagine the debtors prison could be quite harsh and, actually, Charles Dickens’ dad
was in debtors prison. It can kind of tell you
a little bit about why he writes the type of books that he does. 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. That’s the topic of this video. Now what we do is something
called bankruptcy. Just so you know, the first
versions of bankruptcy weren’t that different
from debtors prison. They are actually more
to protect the creditor then 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 wacky debt treadmill. Let’s talk a little bit about bankruptcy. I’m going to focus on bankruptcy as it is in the United States. Let me write down
bankruptcy in a new color. (writing) Bankruptcy, bankruptcy. It’s going to have a U.S. focus. In general I’m going to talk about personal bankruptcy,
although a lot of what I talk about, on some level,
applies to corporations as well. I’ve actually made videos on that as well. Let’s say I’m just overwhelmed with debt. I have $100,000 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? There’s a couple of options
in the United States. You have Chapter 7, it
seems very complicated, these are all different,
literally, chapters of the bankruptcy code. (writing) You have chapter 7. This is called a straight bankruptcy. This is literally you
go … it’s not a simple procedure, but the gist
of it is you go to the bankruptcy courts and
you say look I can’t pay back my debts. What they’re going to do
is they’re going to take my assets and then
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 pots and pans, and maybe one television,
and maybe 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 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. 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. That’s a straight bankruptcy. I say why doesn’t everyone
do that who’s under a big heavy load of debt,
well one there’s a lot of rules that make this easy
or not so easy to do, but the other thing is it
stays on your credit report for 10 years. (writing) 10 years on credit report. So, you’ve got to think to yourself, am I going to be better
off over the next 10 years continuing to pay off my debt? If I can pay off my debt,
if I have any chance I should probably do
that so that I don’t ruin my credit for the next 10 years, but if it’s just a hopeless situation I might as well do it. Just so you know, this
isn’t a cure for everything. If you’ve got … If
you’re sitting on $300,000 of student loans, I say,
wow, let me just … that’s going to take me
more than 10 years to pay anyway, let me just declare
Chapter 7 bankruptcy, it will be unfortunate to find out that student loans cannot be forgiven in a Chapter 7 bankruptcy. 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 taxes, student loans, child support, those won’t be forgiven. This will definitely
apply to things maybe like credit card loans. This isn’t just a very,
very simple process, so any of these things that I talk about you definitely want to
consult an expert on your particular situation to get
a little bit more detail. This is just an overview. 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 you’re going to hear the most about in
the context of a personal bankruptcy is Chapter 13. (writing) Chapter 13. This is often referred
to as a reorganization. (writing) reorganization. Here the idea is, look, I have a salary, I have a job, but I
just have more debt then is imaginable. 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. So, here the situation
is, look Mr. 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 ask me to do that I’m just going to end up in Chapter 7 eventually, so for both my sake, me as 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 that I can realistically pay you over the next 3 to 5 years. That might involve you saying, hey instead of being owed
$50,000 you now owe me $40,000 or instead of
the interest being on my credit card being 20% a
year, let’s change that to 10% a year, so there
will be a little bit of a negotiation. You’re going to have
to come up with a plan and once you come up with that plan, I’ve got to pay that over
the next 3 to 5 years. (writing) 3 to 5 years. Once again, you might say
hey that’s pretty good, if I owe $100,000 in credit card debt and I kind of go to my creditors and look like a genuine individual and make a nice sob story
they’re going to lower my debt, I’ll be better
off then if I didn’t do it. Here again, there’s a penalty to doing it and once again it shows
up on your credit report. In general, they’re going
to come up with a plan for you to pay back your
creditors over 3 years and then after that it’s
going to show up on your credit report for another 7 years. (writing) 7 years on credit,
on your credit report. So in general from the time you file until the time it leaves your credit report it’s going to be 10 years,
just like Chapter 7. In either of these situations
these aren’t things that you want to just jump into and think, wow, I’ve found
an easy out from my debt. These are very serious
things that will impact you for a reasonable chunk of your life, so these aren’t just simple things to do. 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 an out where they can feel that,
look, if I do this or that then maybe over the next
either 3 years or 10 years depending on how you
view it, they can get to a new start. Just so you have a sense
of how often this occurs, I looked this up a little bit earlier. In the U.S., in the U.S.,
and as you can imagine we’re in the middle of a recession now, so bankruptcy filings are
going through the roof, so let me write this down. This is Chpater 7. (writing) Chapter 7 and here’s Chapter 13. 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 the rest of us get, just because we want to promote, I guess people who produce food. Then there is Chapter
11 which is essentially business reorganization,
it can apply to some individuals who are essentially big shots, 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. Those are kind of the two other Chapters. From a personal bankruptcy point of view, Chapter 7 and Chapter
13 is what most people concern themselves with. Now just to give you
the numbers of how often this is occurring, just
if you find yourself in this circumstance,
just so you know that you’re not necessarily
alone and also just to see that they really are increasing right now. (writing) 2007, 2008, 2009. Chapter 7 filings in the
United States in 2007, 413,000, in 2008 it went up to 560,000. This is a more than a 25% increase. Then in 2009 819,000
filings, essentially double of the number of Chapter
7 filings in 2007. If you look at Chapter
13, in 2007 we had 277,000 filings, so for every 2
Chapter 7’s there looks like there’s about … well
for every 4 there’s about 3 of these. Then we have 334,000 in
2008 and then 370,000 in 2009. You can see that the
Chapter 7 ones are … I mean they are both
increasing really fast, but Chapter 7 is even more dramatic. 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.