Bankruptcy is a type of legal proceeding that a person or entity may use to have certain debts against them reduced or discharged. Bankruptcy is an extremely serious matter. Filing for bankruptcy can have significant consequences and will remain on your credit report from anywhere between seven to ten years. Thus, it should only be used as a last resort.
A person who is debating whether or not to file for bankruptcy should consider a number of factors before making their final decision, including:
- Whether there are other alternatives available to pay down their debts;
- The type of bankruptcy they intend to file;
- Whether bankruptcy will solve their problem since some debts cannot be discharged through a bankruptcy proceeding;
- The property they may lose during the process;
- How much the entire process will cost;
- How long the entire process may take;
- Whether they can accept the fact that their financial situation will become public knowledge; and
- If they are able to live with the idea of having bankruptcy affect their credit and ability to obtain loans for possibly the next 10 years.
As is evident from the above information, it is very important that you think long and hard about the ramifications before filing for bankruptcy. Read as much information as you can about the process, so you can make an educated decision. If you are unsure whether filing for bankruptcy is the right option or if you need assistance, you should speak to a local bankruptcy attorney for further advice.
What Should I Do Before Filing for Bankruptcy?
Bankruptcy is a very serious matter that requires a great deal of forethought and planning. Thus, before filing for bankruptcy, it is important that a debtor take the following steps to prepare:
- Compile financial records: Compile a list of property, debts, assets, income, liabilities, and expenses. Keep in mind that debts, such as federal student loans, child support, alimony, and taxes are not dischargeable. Depending on the type of bankruptcy, a debtor may also want to consider what types of property are exempt from bankruptcy. Each state has its own set of property exemption laws. Thus, exemptions will vary by state.
- Get credit counseling: Federal bankruptcy law requires that a debtor get credit counseling from a list of approved credit counselors before filing for bankruptcy. To be safe, the debtor should complete this process within 180 days before filing. If a debtor fails to obtain a certificate of completion from this course and proceeds to file for bankruptcy, the court will reject the filing.
- Determine type of bankruptcy filing: The most common type of bankruptcy filings are Chapter 7, Chapter 11, and Chapter 13. There are several others that are not used as often, including Chapter 9, Chapter 12, and Chapter 15. Chapter 11 bankruptcy filings are used for businesses. For the purposes of this article, however, the discussion will focus on Chapter 7 and Chapter 13, which primarily deal with individuals.
- Before filing Chapter 7 bankruptcy, a debtor will be subject to the “means test”. This test is used to assess a debtor’s ability to repay creditors and compares their income to the median income in their state. If their income is above the average, then a second test will be done that measures the debtor’s income versus their essential expenses. The court will use these outcomes to determine eligibility.
- Before filing Chapter 13 bankruptcy, a debtor should check that their debts do not exceed a certain amount. The exact amount changes periodically. A debtor filing for Chapter 13 bankruptcy should also draft a repayment plan that demonstrates how they will repay their creditors over the next three to five years.
- Confirm eligibility: Regardless of what Chapter of bankruptcy is being filed, an individual or entity must confirm that they are eligible. Requirements to confirm eligibility will vary by Chapter.
- Complete forms: Complete as many forms as possible before filing. Obviously, the forms that must be filed immediately have to be finished, but there are also certain forms that can or must be filed after the initial bankruptcy petition is filed. Forms that are filed afterwards must be submitted within 14 days.
How Do I File for Bankruptcy?
The process of filing for bankruptcy can be very challenging. It is a legal process that either reduces, eliminates, or restructures a person’s debts.
To initiate the process, the person or entity must file a bankruptcy petition with a federal bankruptcy court. A bankruptcy petition is a collection of forms that contains a list of assets, property, finances, debts, liabilities, and any other information associated with declaring bankruptcy that a court requires to make a decision.
After filing for bankruptcy, the judge will review the petition and decide whether the person or entity is eligible for declaring bankruptcy. Also, any additional forms or documents that were not provided at the time of filing, must be handed over to the court within no later than 14 days of the date the petition was filed. If the court grants the petition, the case will be assigned to a court trustee who will hold a “meeting of the creditors.”
A debtor must appear at this meeting, also informally known as a “341 meeting,” to discuss their property and debts with the court trustee. Their creditors, however, are not required to attend. At this stage, the debtor should also file any objections or motions they have against their creditors’ claims. Such issues must be addressed before a court closes the case.
The debtor will also need to complete forms that lay out their repayment plan. In other words, how they intend to manage their debts and liabilities moving forward. Before they can receive a discharge, the debtor will be required to complete a second debtor education course as well. This course is mandatory and failure to complete it can lead to closing a case without a discharge and expensive filing fees to reopen a matter.
Once all of the above steps are complete, the court will determine whether to issue a discharge order. A debtor who receives a discharge order will no longer be obligated to pay their pending debts. The order also serves as a protection measure against creditors because it takes away their collection rights.
Finally, although it is not necessary to hire a bankruptcy lawyer to assist with this process, it is highly recommended that individuals or entities obtain one. A bankruptcy judge will not be able to offer any advice and there are many complicated forms that must be filled out as well as complex laws that must be followed.
There are also some significant differences between the types of bankruptcy filings and failing to comply with the proper rules can lead to serious consequences. Hiring a bankruptcy lawyer can prevent these consequences from happening.
What Should I NOT Do Before Filing for Bankruptcy?
In order to maximize one’s success, there are three important steps that a debtor should avoid taking before filing for bankruptcy. A debtor should not:
- Go on a spending spree: Before filing for bankruptcy, it is imperative that a debtor does not go on a spending or shopping spree. Of course, they should buy necessities (e.g., groceries, medication, etc.), but they should not buy frivolous or unnecessary items like a big screen TV. Any luxury item purchases will be brought up in court and a judge may think that a debtor is attempting to abuse the court’s power and defraud new creditors.
- Give away their property: Unless ordered by the court or advised by an attorney, a debtor should not give away any property. For example, do not give away a car to a family member or try to sell any items to a friend before the filing. Such transactions are considered illegal and are known as “fraudulent transfers”. A bankruptcy court will be permitted to reverse or undo any fraudulent transfers it discovers.
- The property in these transactions are usually used to pay off the debt owed to creditors. Furthermore, the bankruptcy court can dismiss a case if it catches a debtor fraudulently transferring their property in an attempt to hide assets from creditors.
- Get tangled in lies: Do not be embarrassed to tell the truth. It is better than getting tangled in lies or fabricating a story. This is especially true when it comes to hiring a lawyer. Do not lie or conceal any facts from a lawyer who is trying to help or is providing representation. If a lawyer does not know all the facts or misunderstands the situation, they will not be able to prepare an adequate defense.
- For instance, if a creditor raises an issue that the lawyer was unable to anticipate due to the debtor’s deception, then this can weaken the lawyer’s argument, which in turn, will hurt the debtor’s case. Many times, a bankruptcy attorney’s success will hinge on whether their client has disclosed all the facts.
To recap, before a debtor files for bankruptcy, they need to remember to avoid doing the three Gs by not: going on a spending spree, giving away their property, or getting tangled in lies or deception.
Do I Need a Lawyer to File for Bankruptcy?
Filing for bankruptcy is a major undertaking. It requires an evaluation of all a person’s finances, property, and assets. It also involves following a strict legal process and having a thorough understanding of the applicable laws. Therefore, if you intend to file for bankruptcy, it is strongly recommended that you hire a local bankruptcy lawyer for further guidance.
An experienced bankruptcy lawyer will already be familiar with the filing process and relevant laws. Your lawyer can help you assess your options, explain the potential benefits or risks, and assist you in preparing and filing all necessary paperwork. Your lawyer will also know what type of bankruptcy you should file for and can represent you at any bankruptcy proceedings.