What Is Bankruptcy?
Bankruptcy is a legal process where a person who doesn’t have the capacity to pay their debts seeks relief from a portion of what they owe or all of it. Being buried in debt is a depressing and debilitating situation. The sound of the phone ringing makes you jump because you know it’s the debt collector calling again. You get final notices in the mail, text messages, emails, and worse, people knocking at your door telling you to pay up.
Bankruptcy is a fresh start and can be very liberating for someone paralyzed by debt. All cases are handled by federal courts under a central set of rules codified in the U.S. Bankruptcy Code. There are two types of bankruptcy that individuals commonly resort to.
Types Of Bankruptcy
Chapter 7 Bankruptcy
Known as a remedy of last resort, Chapter 7 bankruptcy is seldom the first recommendation for people seeking debt relief. This is because Chapter 7 bankruptcy involves the liquidation of assets. This means that the debtor’s assets will be sold and the proceeds used to pay off all or part of the debt. The debtor will be able to keep some properties that are exempt from liquidation.
The chance to start over with a blank slate is very tempting and Chapter 7 bankruptcy is sometimes subject to abuse. That is why the law provides for certain eligibility conditions that must be met by someone who wants to file for bankruptcy. These conditions include:
Bankruptcy Filing In The Past
A person who filed a petition for Chapter 7 bankruptcy in the past and received a discharge cannot file another petition for eight years since the date the first one was filed.
However, if the first petition was not completed and there was no relief received, then a second petition may be filed at any time. This of course depends on whether or not the court gave a provision on the first petition that bars a subsequent petition.
In order for you to qualify for bankruptcy, you need to undergo a prebankruptcy credit counseling course. These courses are regularly conducted by approved agencies. The U.S Department of Justice has a complete list of approved agencies on its website.
Credit counseling is required to help you determine if there are other options you can explore before you file for bankruptcy. You must go through the course within six months prior to filing for bankruptcy. The agency will provide you with a certificate that you will file with the court as proof.
Don’t confuse credit counseling education with debtor education. The former is required before you can file for bankruptcy while the latter is another course you need to take after the bankruptcy is filed.
The bankruptcy means test determines if you qualify for bankruptcy by looking into your finances. It checks if you have available income that can be used to pay your debt. The test works only for those that have consumer debts like credit card debts. If your debt is from your business, passing the means test is not essential.
The means test is a two-part test. The first part checks if your household income falls below the median income in your state. You can provide documentation to show your income within the past six months. If your income is shown to be below the median income then you pass the test and are deemed eligible for Chapter 7 bankruptcy.
The second part checks for disposable income. You are required to submit documentation of all your expenses during the past six months. All “allowable expenses” are calculated and what’s left of your income after allowable expenses is considered disposable income. This can be used to pay your debt or at least part of it.
It is very important not to hold any information at this step. If you are found to have kept any expenses secret, your case could be thrown out . Allowable income is based on standards set by the Internal Revenue System (IRS) on both national and local levels.
Food and clothing are covered by national standards while things like car and housing payments are under the local standards. The remaining disposable income will be considered and if it is deemed not enough you may qualify for Chapter 7 bankruptcy.
If you fail the test it doesn’t mean all is lost. You can take the test again in another six months since it considers your financial situation within the past six months.
Chapter 7 Bankruptcy Process
Here is what happens when you file for Chapter 7 bankruptcy:
Filing The Petition For Bankruptcy
Your petition contains all the information that the court needs to determine if you should be granted a discharge. It has all your financial information covering your income, debts, assets, and asset transfers within the last ten years. It should also contain the certificate provided to you by the credit counseling agency.
An automatic stay calls off your creditors.
You will get relief from creditors hounding you at this point. They will be ordered to stop collecting or trying to collect from you. They cannot call, email, text, or come to your door while your petition is pending. They cannot foreclose or repossess the disputed properties either. This is however without prejudice to the right of the creditor to go to court and request that the automatic stay be lifted.
A meeting with your creditors will be scheduled down the road. To prepare for it, the next step means gathering up all relevant financial documentation and giving these to the trustee. These documents are your evidence that backs up the claims found in your bankruptcy petition. Paperwork must be sent to the trustee at least five days before the meeting with the creditors.
Meeting The Creditors.
At the meeting, the bankruptcy trustee is expected to ask questions about your identity and finances for verification purposes. In many cases, the creditors don’t even show up to ask questions.
Financial Management Course (Debtor Education)
As mentioned above, after you file for bankruptcy you are required to undergo another course. The debtor’s education course provides insight on how you can properly manage your finances to avoid insurmountable debt.
Getting A Bankruptcy Discharge.
After all the necessary documents have been submitted and are found by the court to be in order, you will be granted a bankruptcy discharge. It will contain information on which debts will survive bankruptcy – meaning you will still have to pay them. These are things like child support, student loans, and recent tax obligations.
Once all your non-exempt assets have been distributed to pay your creditors and if you are not involved in bankruptcy litigation, the court will now close your case.
Chapter 13 Bankruptcy
Known as the “wage earner’s plan”, Chapter 13 bankruptcy is the preferred type of bankruptcy for many debtors, especially those that have enough disposable income to work with. This type allows you to come up with a sustainable payment plan to repay your debts within a three- or five-year period.
Why Is Chapter 13 Better Than Chapter 7?
There are several advantages to repayment as compared to liquidation. The most important of which is that it helps you save your family home from foreclosure and even fix delinquent payments eventually. Chapter 13 basically allows you to reschedule your payments based on your income amount and frequency.
Another advantage is you don’t have to deal with multiple debts. Your debts are “consolidated” in a way. The bankruptcy trustee will be the one to receive all your payments and they will then distribute payment among your creditors. You also don’t have to deal with the creditors since it will be the trustee who will be in contact with them.
To qualify for Chapter 13 bankruptcy you must show that your unsecured debts are not more than $394, 725 and that your secured debts are not more than $1,184,200. These amounts change regularly because it is dependent on the present consumer price index.
Chapter 13 Bankruptcy Process
Here are the things you can expect will happen during the Chapter 13 bankruptcy process:
Complete the credit counseling course.
This is the same course required in Chapter 7 bankruptcy.
Fill out the forms and draft your plan.
The bankruptcy petition consists of forms where you will need to disclose all your income, debts, property, and property transfers. The petition should also contain your draft of your repayment plan.
Filing of the petition.
You will file the petition, containing all documentation in court. It should also be accompanied by your most recent tax return as well as proof that you filed your tax returns during the last four years.
A bankruptcy trustee is appointed.
The trustee will be in charge of looking over your repayment plan and making sure that it is within legal bounds. Collection of the payments from you and distribution of payments to creditors are also part of the trustee’s responsibilities. The trustee also monitors your monthly income and expenses.
Once the bankruptcy petition is filed an automatic stay takes effect, just like in Chapter 7.
Like in Chapter 7, you will also need to meet with the creditors, with the trustee facilitating the meeting.
The court will conduct a hearing to hear any objections from the creditors or the trustee. If there are no objections or if the objections are resolved immediately, your repayment plan will be approved by the court.
Debtor education course.
Like in Chapter 7 you will be required to attend and complete the debtor education course to guide you in financial management.
Follow your plan.
Stick to your repayment plan and give payments on the schedule you indicated therein.
Once you complete your repayments and the period ends, the court will give you a discharge, and your remaining qualified debts are wiped out.
Getting A Bankruptcy Professional’s Help
The bankruptcy process may not seem too complicated if you look at the simple steps provided above but it is very tedious and complicated. If you make any mistakes in your documentation, or inadvertently withhold financial information, your petition may be denied. An experienced bankruptcy professional can help you through the whole process so you can be sure that your documentation is all in order.
A bankruptcy lawyer can help you by representing you in court and making sure that all your interests are protected. Other bankruptcy professionals can help you with the documentation process and with the gathering of financial data.
Remember, there is no shame in filing for bankruptcy. Everyone needs help at some point and for now, it’s you who needs help. Help yourself by hiring [rofessionals who can help you escape debt and enjoy a brighter future.
At Lincoln-Goldfinch Law, we’ve never been scared of saying what we believe. We do not compromise our values for more clients. Instead, we fearlessly and optimistically provide the communities we serve with transparent, empathetic legal representation that takes care of our clients and the hopes and dreams of their families. That’s why we believe it is our moral imperative to provide every opportunity available under the law to get a fresh start and a fresh perspective on their lives.
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We encourage you to give us a call today, so we could get to know you and help you make the best decision, whether it is one built around bankruptcy or another debt elimination solution that will help you regain clarity, peace, and balance.
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