Bankruptcy can provide temporary relief for persons or businesses that are in debt. Bankruptcy can allow debtors the time to reorganize their financial obligations into a more manageable plan, or in some cases eliminate certain debts completely. However, the bankruptcy process is extremely complex and requires a great deal of advice and planning. In addition, there can be some serious consequences that come with the bankruptcy process, such as the forced sale of nonexempt property or a large decrease in your credit score. Before filing for bankruptcy, you should consult an attorney or financial advisor to determine if there are any better alternatives (e.g. negotiating with creditors).
Bankruptcy is an extensive process and requires a great deal of planning and forethought. Before filing you should always address the following steps:
- 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 type has limitations and requirements that you should be familiar with before deciding to file.
- 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. Depending on the results on the means test, you may not be eligible to file for Chapter 7 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 gather and organize all information regarding your financial situation. Create lists of every creditor and determine if they are secured creditors or unsecured creditors. Secured creditors have liens or mortgages on your property while unsecured creditors do not. All creditors must be properly notified when you file for bankruptcy.
To begin the bankruptcy process, a bankruptcy petition must be filed with the court along with several other required forms that will require a great deal of information on your current financial situation. When completing these forms, it is essential to completely and accurately disclose all financial assets and obligations or there can be serious consequences. In addition, you will be required to submit a detailed explanation of why you have decided to file for bankruptcy. Many of these forms must be filed within (14) days after you file for bankruptcy and therefore it is recommended that you have these forms completed before you file the bankruptcy petition.
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 purchase luxury or entertainment items as the judge may feel that you are trying to use the court to defraud newer creditors.
- 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.
Since these requirements are so complex, it is highly recommended that you hire an attorney before starting bankruptcy proceedings. An experienced bankruptcy attorney can help you file the required paperwork, negotiate with creditors, meet important deadlines, and represent you in court.