Petitioning for bankruptcy can be a long process, but it doesn’t need to be a difficult one. Most of it is simply a matter of filling out the paperwork correctly and approaching things in the right order.
When a debtor attempts to declare bankruptcy, their case is examined by a government employee called a trustee. The trustee is responsible for overseeing the bankruptcy and handling issues throughout the process. Most petitioners deal mainly with the trustee, and won’t actually have to appear in court, other than to confirm their debt payment plan for a Chapter 13 bankruptcy. A large portion of bankruptcy cases are handled mostly through paperwork, and are more like an administrative process than a legal proceeding.
Types of Bankruptcy
When determining what kind of bankruptcy to file, debtors must consider their ability to pay their debts, and whether they have assets they would like to preserve. A Chapter 7 bankruptcy generally discharges all debts, but also requires most assets to be liquidated in order to pay off at least some debt.
The debtor must also pass a means test, which is conducted in order to exclude individuals with high income or a lot of assets from filing for Chapter 7. It generally takes three to six months to fully process a Chapter 7 bankruptcy and have debts discharged.
Individuals that don’t pass the means test can declare Chapter 13 bankruptcy, where certain debts are restructured and a payment plan is created. The petitioner then makes monthly payments to settle as much debt as possible with their current income.
Debtors are not generally forced to sell property in a Chapter 13 bankruptcy because current income is used to pay off debt. A Chapter 13 bankruptcy typically concludes after a three or five year payment plan. Once the payment plan is finished, all debts included therein are considered paid off.
Learn more about the differences between Chapter 7 and Chapter 13 bankruptcy.
Steps to File Bankruptcy
When filing for bankruptcy, there are a number of steps to take in order for your petition to be approved:
1. Your Financial Inventory
The first step is to assemble all of your financial information. You will need as much detailed information as possible on the following items. Keep in mind that collecting this information may take some time. If you are married, but your spouse is not jointly filing bankruptcy with you, include his or her information as well.
- Debts. Include the creditor, the current balance, the interest rate, your monthly payment, and any other relevant information. Include all debts, even ones you are current on paying.
- Income. Include any money you have received for any reason in the past six months, any money you expect to receive in the future, how often you receive this money, and where the money is coming from. This includes your regular working income, unemployment compensation, income from side jobs, dividends or interest from investments, pensions, and money contributed to the household by other people, such as your spouse or family members. You do not need to include income from Social Security, however.
- Assets and Property. Include anything you own that has value, such as stocks, savings accounts, real estate, cars, collectibles, and art. Also list items like clothes, home furnishings, and other personal possessions, especially if they’re particularly valuable. Personal possessions are generally considered “exempt,” that is, they won’t be sold in a Chapter 7 bankruptcy. However, what is considered exempt in one state may not be in another. So it’s best to make a comprehensive list and ask the trustee or your attorney what is considered exempt.
- Monthly Household Living Expenses. Include your costs for rent or mortgage, food, utilities, medical expenses, clothing, taxes, transportation, child support, and alimony. When listing variable expenses, such as utilities, calculate an average based on the past year’s monthly bills.
The trustee may request additional documentation to better understand or verify the amounts you claim. So while you are compiling this list, keep documentation on hand and print out all online records.
2. Credit Counseling
You must undergo credit counseling from an approved agency at most six months before you put in your petition. This type of counseling will often take only an hour or two, is frequently conducted over the phone or Internet, and is usually under $100 per session. If you forgo credit counseling, your petition will not be accepted.
To get the most out of your counseling appointment, have your financial inventory ready before you go. The credit counseling agency will then help you determine which kind of bankruptcy is most appropriate and, if you choose to file Chapter 13, they will help you with your payment plan. It is important to fully understand the payment plan because payments must begin no later than 30 days after you submit your petition, even if the petition is not yet accepted.
When you file your petition, you will need to provide proof that you have received credit counseling. For more information, see this list of approved credit counseling agencies.
3. The Creditors’ Meeting
After the bankruptcy petition has been filed and accepted, your creditors receive a notice that you have included their debt in your petition. This letter also notifies them of the automatic stay on your accounts (see below). Approximately three to six weeks later, the trustee will set up a meeting for your creditors. At this meeting, also known as a 341 meeting, lenders can send a representative to question you or the trustee. While lenders are not required to attend, you are. If you are married, your spouse must also attend, even if he or she is filing bankruptcy separately or not filing at all. The bankruptcy judge will not attend. However, you will be sworn under oath to answer all questions correctly and to the best of your knowledge.
During this meeting, the trustee will make sure you are aware of the consequences of declaring bankruptcy and that you understand the effect of reaffirming a debt. You will then confirm that you wish to move forward with the bankruptcy proceeding. The trustee also uses this meeting to look for evidence of “abuse” (i.e. if you are declaring bankruptcy for personal gain or otherwise attempting to “game” the system).
The Automatic Stay
Once you have filed your bankruptcy petition, the automatic stay prohibits your creditors from making further collection attempts. In other words, creditors cannot continue or begin legal proceedings due to debt, enter liens against your property, or try by any means to take money or property to satisfy unpaid debt.
In a Chapter 13 bankruptcy, creditors are also prohibited from attempting to collect money from any co-signers on unpaid secured debts, such as a home mortgage. There is no such restriction in a Chapter 7 bankruptcy.
However, there is one important exception to the automatic stay: Automatic payments taken out of your paycheck for a 401k loan will continue.
After the Meeting
Once your creditors have had a chance to question you and review your payment plan, they can either submit a formal objection or do nothing. If they choose to submit an objection, they generally have 60 to 90 days to do so from the time of the meeting. They can also request to extend the time for objections. Any objections raised must be addressed and satisfied before proceeding forward. If there are no objections, your bankruptcy petition will move forward after the objection period has expired.
In a Chapter 7 bankruptcy, the next step is liquidation of your assets. Once the assets are liquidated, the trustee will pay your creditors from the proceeds. After they have been paid or if you do not have any assets that can be liquidated, the bankruptcy judge will issue a discharge order. This is an official letter stating that the remainder of your debt has been discharged or wiped out, and that lenders cannot continue their collection attempts.
In a Chapter 13 bankruptcy, if there are no objections to your payment plan, it will generally be approved by the judge at a confirmation hearing. The hearing must be held within 45 days of the creditors’ meeting. Once your payment plan is confirmed as approved, you will begin making payments directly to the trustee on a monthly or biweekly basis. The trustee will then pay your creditors for you. After completing the payment plan, the judge will issue a discharge order for any remaining debt.
4. Post-Bankruptcy Credit Counseling
Once you have had either your creditors meeting (Chapter 7) or are close to making your last payment (Chapter 13), you will need to undergo a post-bankruptcy credit counseling course.
For Chapter 7 bankruptcies, this must happen within 45 days of the creditors meeting. For Chapter 13 bankruptcies, this must happen before the day you make your last payment or the day you file a motion to discharge the bankruptcy if you won’t be finishing the payment plan.
If you do not send confirmation to the trustee that you have completed post-bankruptcy counseling, you will not be able to complete the bankruptcy process and have your debts discharged.
Additional Considerations for Bankruptcy
Bankruptcy and Your Spouse
Married couples with financial problems may choose to file separately or file one bankruptcy case together. Many choose to file together simply because they do not have to pay two separate filing fees and also because spouses frequently co-sign on one another’s loans.
For example, Tim and Mary are married, and both of their names are on their home loan, credit cards, and car loan. Tim lost his job last year, but Mary did not. Tim decides to file Chapter 7 bankruptcy alone. But since he’s proceeded in this way, in all likelihood, his creditors will begin collection attempts to force Mary to pay on the shared loans, even if she cannot afford to do so alone.
So while it may seem logical for one spouse to “take the fall” and declare bankruptcy, this will not be an effective remedy if both spouses have co-signed on loans.
File Alone or with a Lawyer?
Because bankruptcy is often complex, most people choose to use an attorney. The average bankruptcy cost with an attorney is between $1,000 and $2,500 depending on the complexity of the case. For obvious reasons, bankruptcy attorneys do not take credit cards, which is why it is important to consider bankruptcy before you are completely out of cash.
You are not required to have an attorney, however, as most of the process is administrative. Filing bankruptcy on your own generally costs between $300 and $500 depending on your area, and you can find all the necessary forms at the U.S. Courts website.
Bumps in the Process
Once your bankruptcy petition is filed, it is not guaranteed to be approved or that all your debt will be permanently discharged. Not only can your creditors raise objections, but the court itself can prevent debts from being discharged for several procedural or legal reasons. The court can also revoke a discharge that has already been processed if there are reasons to believe it should not have been processed in the first place.
Some of the issues that can plague a bankruptcy petition are as follows:
- The court has evidence that the debtor is acting fraudulently or has committed perjury.
- The debtor fails to provide required tax documentation.
- The debtor cannot account for any loss of value in their assets.
- The debtor transfers or hides property with the intent to keep it from creditors.
- The debtor intentionally destroys or hides documentation, paperwork, or records.
- The debtor acquired new property or other assets during the course of the bankruptcy proceeding and did not notify the trustee or court.
- The debtor was asked for explanations, information, or additional documents during a review or audit of their case and did not provide it.
- The debtor failed to obey a lawful order of the bankruptcy judge or trustee.
- The debtor does not complete a credit counseling program.
- The debtor does not complete their Chapter 13 payment plan in full or on time.
Also, an individual cannot successively declare bankruptcy within a short period of time. The length of time between bankruptcies, however, depends on the type of bankruptcy in each case.
- Between a fully discharged Chapter 7 bankruptcy and filing a second Chapter 7 bankruptcy: Minimum of eight years
- Between a fully discharged Chapter 7 bankruptcy and filing a Chapter 13 bankruptcy: Minimum of four years
- Between a fully discharged Chapter 13 bankruptcy and filing a second Chapter 13 bankruptcy: Minimum of two years
The advantages and repercussions to filing for bankruptcy can be many and complex, and the process can seem overwhelming. But if you feel that bankruptcy may be a good option for you, follow the steps above and make the most of your required credit counseling sessions. In this way, you can understand how the process will affect you now and for years to come.
Have you been through the process of filing for bankruptcy? What are some other things to watch out for?