How to file for bankruptcy – Forbes Advisor

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Bankruptcy can be something of a financial renaissance, allowing you to shed a heavy debt load and (hopefully) become a wiser and more efficient user of your financial resources. Like a real birth, bankruptcy does not happen overnight. It may take months or years, and a lot of time, energy and a little money, before you can feel the relief of paying off some or all of the debts.

Yet bankruptcy is filed by consumers hundreds of thousands of times a year. Here is a step-by-step process for those interested in filing for Chapter 7 or Chapter 13 bankruptcy.

How to declare bankruptcy: a step-by-step guide

Bankruptcy is governed by the United States Bankruptcy Code, a federal law, so the process is very similar in any of the 90 federal bankruptcy courts nationwide. However, there may be local variations and each case is different. This guide therefore serves only to provide a general overview of the bankruptcy process.

1. Consider all your options

Before choosing to declare bankruptcy, ask yourself if it is your best option.

Bankruptcy can help stop creditor collection efforts and ultimately pay off or eliminate many of your current debts. However, it cannot eliminate all debts. You may not be able to pay certain types of student loan debt, unpaid taxes, child support, and alimony.

Bankruptcy also has a serious downside. After you declare bankruptcy, it will remain on your credit report for seven to 10 years. It can therefore be difficult to borrow money, obtain a credit card and fully participate in the financial world.

Before you take the plunge into bankruptcy, consider other forms of debt relief. This includes options such as non-profit credit counseling, debt management plans, debt consolidation, and debt settlement.

This is a good time to gather your documents and financial information. Check your credit report. Gather your latest tax return, recent loan and credit card statements, current bank statements, and pay stubs. You will need it to evaluate the deposit decision and you will need it again if you deposit.

2. Choose your type of bankruptcy filing

Bankruptcy protection for individuals comes in two different versions, each named after a chapter of the Bankruptcy Code. Before pursuing personal bankruptcy, you must decide whether you will seek relief under Chapter 7 or Chapter 13.

If you have decided to go ahead with filing, you can choose to file for Chapter 7 bankruptcy, the most common type. In a Chapter 7 filing, you voluntarily surrender assets to the bankruptcy court, which sells them and pays the proceeds to your creditors.

Some assets are exempt from this requirement, but this varies by state law. Exemptions can cover motor vehicles, pensions, clothing, personal jewelry, household goods and appliances, and equity in a principal residence.

Once creditors have received the proceeds from the sale of non-exempt assets, the debts are discharged. This process can take several months, during which time creditors must stop trying to collect.

Chapter 7 involves what is called a resource test. Specifically, your income for the last six months must be less than the median income for your state. If you earn more than the state median, you will need to choose another type of bankruptcy, most likely Chapter 13.

The Chapter 13 bankruptcy process involves setting up a repayment plan to pay off your creditors. This type of bankruptcy is more complicated than the discharge granted by Chapter 7 and also takes longer. Typically, the repayment plan lasts three to five years.

3. Hire a lawyer or Go Pro Se

The last thing anyone facing bankruptcy wants is another bill. And hiring a bankruptcy attorney doesn’t come cheap. It can cost thousands of dollars for a Chapter 7 filing and even more for a Chapter 13 filing. Costs can vary depending on where you are filing and the complexity of your case.

However, it is possible to obtain an initial consultation with a lawyer free of charge. You can gain valuable information during an hour-long conversation, including whether or not you are a good candidate for bankruptcy.

Less expensive legal aid is available. Check with your state bar association, American Bar Association, or local legal aid clinic for affordable or even free attorneys to help with your bankruptcy. If you are unable to afford a lawyer, you can get free legal assistance.

Self-representation, known as pro se, is another option. Despite the potential costs, chances are you’ll be happier using a lawyer. According to a 2018 study by the American Bankruptcy Institute, about one in nine Chapter 7 cases are pro se. The same study also found that, compared to lawyer-represented filers, professional filers were nearly 10 times more likely to have their cases dismissed or some debt discharge requests denied. Chapter 13 cases are more complex and benefit from even more professional assistance.

If you hire a lawyer, you can expect the lawyer to question you at length about your situation, ask you to gather relevant documents and review them, complete and file necessary court documents, and represent you in court. court.

4. Take a credit counseling course

Whether you go it alone or with the help of a lawyer, you will need to take a course in credit counseling before filing your application. The course must be from a government approved body and completed within 180 days of filing.

The credit counseling course will help you decide if you want to declare bankruptcy or choose another method. The course can be done online, over the phone or in person and costs around $50. You may be eligible for a fee waiver if your income is low enough. You will get a certificate that you have to show in court.

5. Complete the forms required by the court

Bankruptcy courts require filers to complete a long list of forms. Some, such as the petition filing and the financial statement, are necessary in all cases. Others, such as a filing fee waiver request, are optional.

You can download the required forms on the United States Courts website. Read the instructions carefully and pay attention to the details. Incorrectly completed forms may result in the rejection of your file.

6. Pay court fees

In addition to many forms, bankruptcy involves many legal costs. For example, the basic filing fee for a Chapter 7 bankruptcy is $245 – there is also a $75 administrative fee and a $15 trustee surcharge.

You may be able to get these fees waived if your income is below 150% of the poverty line as defined by the Bankruptcy Code. Other fees, ranging from certifying documents to obtaining copies, may also apply.

7. File forms with the court

Your next step is to file the forms with the court. This involves going to the courthouse and presenting your forms to the clerk. You cannot expect legal help from clerks, so make sure you have completed the forms as instructed.

Once you have filed your petition, the court will appoint a trustee to oversee your case. The syndic will contact you by mail and will ask you, among other things, for copies of your forms.

8. Meet with creditors

You may not have to appear in court, but you will have to attend a meeting of creditors, also called a 341 meeting, since it is mandated by Section 341 of the Bankruptcy Code. Your creditors may not be there, but if they are, they may ask you questions about your financial situation. The trustee will also be there to inquire about your situation. You’ll be under oath, so this is serious business.

9. Complete formation of the debtor

In addition to the pre-bankruptcy credit counseling course, you will need to complete a post-debtor filing training course before your debts can be discharged. As with the pre-bankruptcy credit counseling course, you must take this course from a government-approved body. This certificate is necessary to complete your bankruptcy.

Debtor education after filing will help you learn how to budget, manage your money, and use credit wisely. The fee is between $50 and $100, but you may be able to get a waiver of this cost if you can’t afford it.

10. Receive a debt discharge notice

The last step is to eliminate your debts. The time it takes for your debts to be paid varies depending on the type of bankruptcy you choose. You will receive a notice when your creditors have paid your debts. At this point, your bankruptcy process is complete.

Common Mistakes People Make When Filing

  • Filing without the help of a lawyer. In most cases, it is best to file with the help of a lawyer. If you can’t afford it, consider investigating free legal aid. Your chances of success improve significantly with the help of a lawyer.
  • Choosing the wrong type of bankruptcy. Picking the wrong chapter is a way to get it wrong early in the process. For example, a Chapter 7 petition may be denied if the filer has sufficient income to repay the loans. Then the only option is to file again, under Chapter 13.
  • Try to pay off bad debts. Another way to fool yourself in bankruptcy is to try to pay off non-dischargeable debts. In addition to real estate mortgages, tax debts, liens, student loans, child support and alimony, non-dischargeable debts also include debts arising from liability for drunk driving and debts acquired in six months after filing for bankruptcy. You may have to pay them the old fashioned way, although you can often negotiate a longer time frame to pay them.
  • Failed to create a plan. Not having a plan and a commitment to avoid going too deep in debt is another way to go wrong. You can apply for Chapter 7 protection again after waiting eight years. A better way is to learn how to manage money and, of course, to be lucky enough not to have an inevitable problem like illness or disaster.

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The process of applying for bankruptcy protection is long, complicated and demanding. However, the relief from heavy debt it provides can be golden. If your debts have become more than you can handle, bankruptcy can offer you a way out and a path to a more prosperous future.