Bankruptcy and Monopoly

The other day we were playing Monopoly. Of course someone inevitably landed on

Park Place, which happened to have three houses on it, and he promptly declared bankruptcy, but then wanted to keep playing. It reminded me that "declaring bankruptcy" doesn't seem to have quite the finality that it once did. This year many well-known companies have done it, but still seem to be around. Individuals were sent (in the US until the 1830's; England until 1869) to debtor's prison, or at least threatened with being sent to a damp, dark, place with rats in it. In the United States, laws have always favored debtors versus creditors. But in 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act made it harder to declare bankruptcy, and prior to it taking affect there was a spike in filings that hit over 2 million! In 2008 there were about 1 million filings, which mean that in the US one in three hundred people declared bankruptcy.

But a bankruptcy is still, for the most part, considered a last-ditch option for dealing with overwhelming debt. Most of your assets go away, and your credit rating takes a fall (a bankruptcy for ten years, whereas a foreclosure remains on it for seven). Most homeowners will avoid a Chapter 7 bankruptcy and instead file for Chapter 13 if they want to avoid a foreclosure. A Chapter 7 filing can wipe out unsecured debts, but secured debts are tied to a specific asset, such as a mortgage secured by a home and which reverts to the creditor. A Chapter 13 bankruptcy doesn't actually wipe out the debt but can shield debtors from their creditors for several months during the forbearance period until a court-ordered repayment schedule can be worked out. During this time most homeowners try to work out a loan modification program.