What Steps Must You Take before Filing Bankruptcy?
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What Should I Consider Before Filing Bankruptcy?
Completing the bankruptcy process can be challenging. There are several steps you should take to make sure your bankruptcy is advantageous for you. If you are debating whether to file for bankruptcy, you should consider all the options that may be available to you. It may be the case that there are other options besides filing bankruptcy, such as renegotiating a contract or rearranging your finances. If you do decide to file, you should consider the following tips:
- Type of Bankruptcy: Decide which type of bankruptcy best fits your situation. Most people file either under Chapter 7 or Chapter 13. Chapter 7 bankruptcy allows most of your debts to be cancelled, while Chapter 13 filings institute a repayment-type plan. Each has their own limitations and specific requirements.
- Credit Counseling: Attend or obtain some form of credit counseling course. This will prep you in terms of further options, and what you have to do fully apply for bankruptcy. Credit counseling also helps you understand which forms and documents are needed for your particular bankruptcy claim.
- Submit your paperwork: This involves filing a petition for bankruptcy with the court. Understand that this often requires several meetings with many parties, including creditors, banks, and your lawyer.
What Should I Do before Filing for Bankruptcy?
- Means Test: You are required to complete a "means test." This is a complicated calculation that determines your ability to pay your creditors. It also compares your financial status to the average person in your area. If you pass this means test, you are allowed to file a Chapter 7 claim in Bankruptcy court – otherwise, you can only file a Chapter 13 bankruptcy claim. Businesses and individuals with high income should consider filing for Chapter 11 bankruptcy.
- Credit Counseling: The next step involves undergoing credit counseling. Bankruptcy law requires that you complete this counseling before going through the bankruptcy process. Fortunately, the credit counseling requirement can be fulfilled online.
- Gather Information: You should also gather and organize information regarding your financial situation. List all of your creditors and determine if they are secured creditors or unsecured creditors. Secured creditors have liens or mortgages on your property while unsecured creditors do not. If you are unsure what type of creditor a creditor is, take note of that. This information will be beneficial before and after you file for bankruptcy.
What is the Means Test?
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), was designed to keep people with higher incomes from filing for Chapter 7 bankruptcy. The means test checks your income in order to determine your eligibility to file for bankruptcy.
One of the first steps you must take when filing for a Chapter 7 or Chapter 13 or bankruptcy is to complete a "means" test. You must submit either a Form 22A (for Chapter 7) or a Form 22C (for Chapter 13) to the Bankruptcy Court before the Bankruptcy Court will hear your case.
Passing the “means test” does not make you automatically eligible for Chapter 7 bankruptcy. The means test is only one requirement the BAPCPA imposes on debtors filing for Chapter 7 Bankruptcy. The debtor must still attend mandatory credit counseling and the judge still has the discretion to dismiss the case if the judge believes that the debtor is filing in bad faith.
How Do I File for Bankruptcy?
Bankruptcy is done by filing with the court, so it may help to consult an attorney at this state if you have not already. In addition to filing, you must submit a bundle of paperwork with the Bankruptcy court. This paperwork includes information about your:
- Personal information
For example, the schedule of assets should state what assets you own and how much you think each asset or class of assets are worth. Be sure to list all your assets or you may be violating the complete disclosure rule. The statement of affairs must also be filed. This document explains how and why you are filing for bankruptcy.
Bankruptcy law requires that the schedule of assets and the statement of affairs be filed with the court at most fourteen (14) days after you file for bankruptcy. It is highly recommended that you file the schedule and the statement with your bankruptcy petition unless there is an emergency, like if your home is being foreclosed.
What Should I NOT Do before Filing for Bankruptcy?
There are three important things a borrower should avoid doing before filing for bankruptcy.
- Do Not Give Away Your Property: Do not give away your property unless a bankruptcy attorney says to do so. For example, do not give your sister your car if you plan on filing for bankruptcy or do not sell your pool table to your friend for cheap the night before filing. These types of transfers are known as fraudulent transfers. The bankruptcy court can reverse, or undo, fraudulent transfers if the transferred property is necessary to pay off creditors. Most importantly, the bankruptcy court can dismiss a case if the debtor fraudulently transferred property.
- No Spending Sprees: Do not go on an enormous spending spree prior to bankruptcy. You can still buy groceries or medication for your child before bankruptcy. However, if you plan to file bankruptcy, do not take a vacation to Las Vegas or buy a new yacht. When debtors start purchasing luxury items prior to bankruptcy, the judge may suspect that the debtor is attempting to defraud the court by having the new debts discharged.
- Be Honest: Don’t be embarrassed to tell the truth. If you hire a lawyer to represent you, do not lie or conceal anything from your lawyer. If a lawyer does not have all the facts, the lawyer will be unable to prepare a defense if a creditor raises an issue that the lawyer couldn’t anticipate. The bankruptcy lawyer’s success depends on the client disclosing everything.
Do I Need a Lawyer to File for Bankruptcy?
Since these requirements are so complex, it is highly recommended that you hire an attorney before starting bankruptcy proceedings. A qualified bankruptcy attorney will help make certain that you do not miss any crucial requirements that can get your case dismissed.
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Last Modified: 08-25-2015 04:19 PM PDT
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