In my experience, working with federal courts is like riding an air conditioned monorail: cool and smooth. They will tell you what they want and you’ll know what to expect, depending on whether you deliver what they want. I love those guys! This certainly holds true for Bankruptcy, which under federal jurisdiction, though state laws play a big part. This article will run through the basic steps of Bankruptcy, numbering them purely for ease of explanation.
The first step in Bankruptcy is to determine whether you want to file for this federally authorized form of relief. As always, the biggest, fattest “don’t” of dealing with the Legal System is: don’t be intimidated by the process or the people. This is your case and you will enjoy the rewards or suffer the losses. Bankruptcy has significant financial consequences, such as staying on your credit reports for as long as 10 years, so it should not be taken lightly. Some factors that might lead a debtor to file for relief in Bankruptcy are: being sued for debts; other attempts by creditors to collect money from you, including but not limited to seizing your assets and/or garnishing your wages; unemployment; unpaid taxes; looming or active foreclosure on your home. When these or other factors are significantly impacting your life, you might seek the relief offered by Bankruptcy.
The second step in Bankruptcy is to hire a lawyer specializing in Bankruptcy. There are do-it-yourself Bankruptcy kits but Bankruptcy requirements can be complicated and mistakes could result in dismissal of your petition, so your best bet is to hire a lawyer who specialized in Bankruptcy. In Chapter 7 Bankruptcy (Liquidation or Straight Bankruptcy), the lawyer cannot be one of your creditors for unpaid fees, so his/her fees must be paid in full before your petition is filed (unless he/she is “bucking for Sainthood” and decides to waive all or part of the fee). In Chapter 13 Bankruptcy (Reorganization), at least some of the attorney’s fees could become part of your repayment plan after filing your petition. In either event, you must also pay sums to the court. As of 11/21/12: Chapter 7 requires a $306 filing fee; Chapter 13 requires a $281 filing fee. Those are expected to be paid in full when you file your petition, unless the court allows payments or waives them due to your inability to pay.
The third step in Bankruptcy is to decide which type of Bankruptcy relief to pursue. The most common types of individual Bankruptcy are under Chapter 7, called “Liquidation” or “Straight Bankruptcy” and Chapter 13, called “Reorganization.” For purposes of this article, we will discuss only Chapters 7 and 13. Basically: Chapter 7 involves the sale of all a debtor’s nonexempt property, payment of creditors with the sale of those proceeds, discharge of some/all debts, and the debtor’s retention of exempt property; Chapter 13 allows a debtor to set up a repayment plan – usually lasting 3 – 5 years – in order to pay creditors and keep large assets, such as a house and a car. Please see our companion article, “DIFFERENCES BETWEEN CHAPTER 7 AND CHAPTER 13 BANKRUPTCIES,” for a more thorough explanation.
The fourth step in Bankruptcy, whether you decide to pursue Chapter 7 or Chapter 13, is mandatory credit counseling. Before filing your petition and within 180 days of that filing, you must undergo credit counseling from an entity approved by the U. S. Trustee. Your lawyer will know which entities are approved. Part of this credit counseling is a “means test” that determines the type of Bankruptcy for which you are eligible. Your attorney will tell you the exact formula but the thrust of the “means test” is that debtors with fewer “means” file under Chapter 7 (“Liquidation”) while debtors with greater “means” file under Chapter 13 (“Reorganization”). Your lawyer will help you with the “means test” to ensure that you are filing under the proper Chapter.
The fifth step in Bankruptcy is filing. This involves a slew of paperwork and an individual debtor will probably file at least: a petition; schedules of assets and liabilities; a schedule of current income and expenditures; a statement of financial affairs; a schedule of executor contracts and unexpired leases; a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case; a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. Your attorney will help you choose and complete every required document.
The sixth step in Bankruptcy is the hearing. After properly filing your petition and other supporting papers, you will receive a notice about a court date for a “meeting of creditors” or a “341 meeting.” Before this court hearing/meeting, your lawyer should meet with you to ensure the accuracy of your paperwork and that you understand the types of questions you’ll be asked. The hearing/meeting will last roughly 10 – 15 minutes: you will be sworn in and you will answer questions “on the record”; creditors might attend and ask you questions; the trustee will ensure that your petition and supporting documentation are truthful, that you understand the consequences of your bankruptcy and that you agree to filing for bankruptcy.
The seventh step in Bankruptcy depends on your creditors’ responses. After your hearing/meeting, creditors have 60 days to challenge the discharge of one or more debts. If creditors challenge, then the process is more complex and time-consuming because you must deal with those challenges. However, if no creditor challenges you: in Chapter 7 Bankruptcy, you will receive a notice of discharge; in Chapter 13, you will begin a payment plan and continue to make those payments until “discharge.” In Chapter 13, “discharge” means that you have made your final payment and completed your payment plan, so the bankruptcy trustee will give you notice of discharge 30 – 60 days after the final payment is made. The entire process from filing your petition to either discharge under Chapter 7 or commencement of repayment under Chapter 13 takes approximately 4 – 6 months.
DO’S AND DON’TS
DON’T be intimidated by the process or the people.
DO determine whether you want to file for Bankruptcy relief by reviewing such factors as:
a. being sued for debts;
b. other attempts by creditors to collect money from you, including but not limited to seizing your assets and/or garnishing your wages;
d. unpaid taxes;
e. looming or active foreclosure on your home.
DO hire a lawyer specializing in Bankruptcy. This case, which requires many documents and can result in dismissal for incorrect filing, will involve everything you have, everything you owe and will appear on your credit reports for 10 years. A do-it-yourself kit is just not worth the risk.
DO decide which type of Bankruptcy relief to pursue, usually Chapter 7 (“Liquidation”) or Chapter 13 (“Reorganization”).
DO attend credit counseling with a trustee-approved entity prior to and within 180 days of filing your petition.
DO take the “means test” to determine the appropriate type of Bankruptcy for which you are eligible.
DO honestly and thoroughly complete the slew of required paperwork, with the assistance of your lawyer.
DO meet with your attorney before the “meeting of creditors” or “341 meeting” to discuss your paperwork and the anticipated questions.
DO attend the “meeting of creditors” or “341 meeting” and answer the trustee’s and creditors’ questions honestly and thoroughly.
DO faithfully follow through with any court-ordered payment plans.
[Note from HandelontheLaw.com: This article is to be used as an educational guide only and should not be interpreted as a legal consultation. Readers of this article are advised to seek an attorney if a legal consultation is needed. Laws may vary by state and are subject to change, thus the accuracy of this information cannot be guaranteed. Readers act on this information solely at their own risk. Neither HandelontheLaw.com, or any of its affiliates, shall have any liability stemming from this article.]