Bankruptcy is a way for individuals to eliminate – or greatly reduce – their debts. It is a legal process with many steps and complexities. The first step, when contemplating bankruptcy, is to determine whether you qualify for Chapter 7 or would benefit from Chapter 13.
Chapter 7 or Chapter 13?
Chapter 7 is a more efficient path to debt relief. It is often the best path for people who do not earn a high wage or are not homeowners. If you have more assets than you can protect under Chapter 7, Chapter 13 may be a better option. The way to determine which chapter to use is through the means test.
The means test uses a formula that compares your average monthly expenses to your average monthly income to determine your disposable income. If you qualify under the means test, it is likely that you will file under Chapter 7. However, your attorney will be able to explain the benefits and drawbacks of Chapter 7 and Chapter 13 and help you select the path that is right for you.
The Chapter 7 process:
Complete credit counseling – Before filing for Chapter 7 bankruptcy, you must complete a credit counseling course. Your lawyer can help you register for this class.
File a bankruptcy petition – Your lawyer will put together all of the paperwork – your petition – and file it.
The automatic stay arises – As soon as your petition has been filed, the automatic stay arises that prevents creditors from contacting you or taking action against you – such as garnishing your wages.
A bankruptcy trustee is assigned – The court will assign a trustee to oversee your case. The trustee will examine your paperwork and your case to ensure there is no fraud.
A meeting of the creditors is held – Your trustee will set a meeting where you will be asked questions about your bankruptcy. This is also an opportunity for your creditors to appear, although this rarely happens.
Complete a financial management course – Before your debts can be discharged you must complete a debtor education course. Your attorney will provide you with this information.
Your exempt property is protected, your debts are discharged – If your Chapter 7 case is approved, all of your unsecured debts will be discharged and your exempt properties will be protected. If you have secured properties – such as a home with a mortgage or a car with a loan – and want to keep those properties you have options, such as reaffirming those loans or paying the loans off.
Your case is closed – Once the debt discharge is complete, your case will be closed.
The Chapter 13 process:
The first steps of a Chapter 13 bankruptcy mimic the Chapter 7 process. You must complete a credit counseling course and file your petition, the automatic stay arises and there is a meeting of the creditors. However, this is where the process begins to differ.
The repayment plan – Either with your petition, or within 14 days of its filing, you must submit a proposed repayment plan. The repayment plan must set out fixed payments to be made to the trustee on a regular schedule. All priority debts must be paid in full under the plan. Secured debts must be paid if you want to keep the underlying property (such as your home or car). Unsecured debts do not have to be paid in full.
Payments begin – Repayment plans typically last three to five years. You must make all payments laid out in the plan. If you fail to make all the payments in full, and in a timely manner, your case can be dismissed.
Your remaining debts are discharged – At the end of the repayment plan, all remaining debts will be discharged and your case will be closed (after you complete a financial management course).
Filing for bankruptcy is a big step. It is important to consult with a lawyer who will take the time to explain your options and the legal process to you.