What Do I Need To File Bankruptcy
Lets face it, bankruptcy isn’t a good thing. It’s a serious legal action that has financial consequences that can last up to 10 years, possibly more. It’s a last-resort action for people who are seriously in debt and won’t be able to climb back out again.
There can be a lot of steps when having to legally file for Chapter 7 or Chapter 13 bankruptcy. You should consult with an attorney or bankruptcy counselor before deciding though. They’ll help you explore other debt options, such as a creditor repayment structure or a debt consolidation loan.
If you are truly out of options, then filing for Chapter 7 or 13 bankruptcy may be your best option.
Eight Step Process To File Bankruptcy
1. Visit with a qualified bankruptcy attorney.
It’s possible that you can file for bankruptcy yourself, but it will be a lot harder to navigate through all the documents and legal procedures if you haven’t done it before. Hiring a good bankruptcy attorney is worth it.
Most bankruptcy attorneys will offer an initial consultation for free. Take advantage of it.
A good attorney will offer you his or her best advice based on your debt circumstances. You will likely find that that advice and the services the attorney will perform are well worth the fees the attorney will charge for handling the case for you.
2. Gather your financial documents and financial information.
Every debtor must provide complete and accurate information to the court on his income, expenses, debts, property (real estate and personal property) and his financial dealings in the months and years leading up to the filing of the case. These are called “schedules” and a “statement of financial affairs.”
Bankruptcy schedules are a series of documents that every debtor must prepare and file with the bankruptcy court. These docs provide all the necessary info about your income, debt amount, types of debt owed, expenses, etc.
There’s a lot of data to be gathered, and it may seem intimidating, but your attorney will be able to help you through it. And, it will be worth it in the end when your discharge is approved.
For people who file bankruptcy, discharge is the ultimate goal. In exchange for that discharge, the bankruptcy court requires that the debtor give up all “nonessential assets” which will be distributed to creditors to satisfy existing debts.
3. Participate in a credit counseling session.
In 2006, Congress created a new provision to the bankruptcy laws that require every individual filing a Chapter 7, Chapter 13 or Chapter 11 case to obtain and file a certificate attesting to the fact that the filer had obtained appropriate financial counseling by an approved provider before filing the case.
Most individuals must participate in a meeting with an approved credit counselor before filing a case to determine if there are bankruptcy alternatives are available. This includes consolidation debt loan, repayment plan at a lower interest rate, or a better budgeting strategy. As you know, bankruptcy should be a last-resort option.
The credit counseling requirement was designed in part to identify those individuals who could benefit from a non-bankruptcy solution, such as debt management program through a nonprofit Consumer Credit Counseling Service.
4. Decide which type of bankruptcy to file.
There’s a few options, but Chapter 7 and Chapter 13 bankruptcy are by the most popular.
About 75% of debtors choose to file Chapter 7 bankruptcy (in the U.S.).
There are many factors to consider in deciding whether a straight bankruptcy or a payment plan bankruptcy is better.
Some of the factors an attorney will help you sort out include:
- How you fare on the Means Test, which is designed to determine whether you can afford to pay at least a portion of your bills.
- If you have a lot of business debt.
- If you owe back payments on a home mortgage or a car.
- If you have student loan debt to pay off.
- If you are deep in credit card debt.
- If you owe federal, state, or city tax to the IRS.
- Whether someone else co-signed on a debt for you.
5. File the bankruptcy case.
Your attorney will handle filing the case for you. Once your case is filed, an injunction called the “automatic stay” goes into effect and a notice is sent to all of your creditors.
The automatic stay prohibits creditors from taking (most) debt collection actions against you.
So, once they’re informed of the bankruptcy case, there won’t be anymore debt collector “robo calls”, wage garnishments, nasty letters, repossessions, foreclosures, or lawsuits without permission of the bankruptcy court.
6. Attend the meeting of creditors.
This meeting is called the “meeting of creditors“, “section 341”, or “the 341 meeting”. If you’re filing without a lawyer it’s important to understand the lingo court terms.
Even though creditors rarely attend it is held under oath, and you’ll have to provide testimony affirming the info you’ve provided in your bankruptcy schedules. The trustee assigned to your case will take this opportunity to learn more about your situation, employment, income, assets, debts, expenses or other relevant questions.
7. Cooperate with the trustee.
When you file bankruptcy, you’re required to list all the assets you own, such as a home, vehicles, rental properties, financial assets (stocks and bonds), etc.
All of that property becomes part of the “bankruptcy estate” when you file a bankruptcy case. You will be allowed to keep certain types of property so that you will have something with which to launch a “fresh start” after the bankruptcy is over.
The property you’re allowed to keep is called “exempt” property, or exemptions. Similar to the “exceptions” section you see when you file your taxes.
If you fail to cooperate, you could lose your right to a discharge.
Depending on what you choose to do with the collateral, the bankruptcy laws impose a deadline of 30 to 45 days after the meeting of creditors to accomplish it.
You may be asked to provide other documents during your case, like updated income records, tax returns, or statements regarding child support or alimony. This falls under the heading “continued cooperation”. If you don’t do it, you won’t get your discharge.
Here is what you’ll need to file Chapter 7 vs. Chapter 13 bankruptcy.
What Do I Need To File Bankruptcy Chapter 7
Entitled by the U.S. Court as, “Liquidation”.
In a Chapter 7 case, if you have property that is collateral on a loan, you filed with your schedules a “Statement of Intention,” in which you stated whether you would surrender the collateral, reaffirm the debt (continue making the payments) or redeem the property (pay the value).
What Do I Need To File Bankruptcy Chapter 13
Entitled by the U.S. Court as, “Adjustment of Debts of an Individual With Regular Income”.
In a Chapter 13 case, you’ll have 3-5 years to make payments that will go toward paying down your debt. Make your payments as you propose in your payment plan, and you will receive your discharge at the end of the payment period.
8. Take your debtor education course.
Along with the credit counseling requirement, the debtor education provision was added to the bankruptcy laws in 2006.
Debtor education is a course in personal financial responsibility that all individual debtors must complete before they are eligible for their bankruptcy discharge. The purpose of the debtor education requirement is to reduce the number of people who have to file bankruptcy again.
What happens after bankruptcy?
When it’s all complete and you are discharged, you will be free from all legal debts owed.
The downside is that bankruptcy is a bad mark on our credit score. Depending on which type of bankruptcy you filed it can stay on your record for a good amount of time. Chapter 7 is the worst and will stay on your credit score the longest.
How long does bankruptcy stay on my credit score?
- Chapter 7 bankruptcy: up to 10 years
- Chapter 13 bankruptcy: up to 7 years
- Late payment: 7 years
- Home foreclosure: 7 years
- Debt collection: usually 7 years
After you are discharged it’s important to understand what to improve on financially. The debtors education will be helpful in learning how to create a monthly budget, hedge against risk, and what types of debt are the worst (usually credit card debt!).
The bottom line is that filing bankruptcy won’t ruin your future. In fact, it should enhance it significantly. It may take a couple of years to bring your credit score up to a decent level. In the meantime, you’ve learned some financial lessons that you should be able to carry with you throughout your life and – hopefully – put into practice to avoid having to file bankruptcy again.