If you're deeply in debt, you may have considered personal bankruptcy as a way out. This should be a last resort since there are a variety of other ways to get debt relief. However, if all else has failed and you’re considering this option, there are some things you need to know.
First of all, you will need an attorney. Preferably one experienced in personal bankruptcy. Although bankruptcy is placed under federal jurisdiction and cases are always filed in the United States Bankruptcy Court, state law does come into play in the majority of cases. Since each state’s laws vary, it’s important to have an attorney who practices in your state to ensure all appropriate rules are followed.
Next, you will need to determine how you got into debt. If unforeseen circumstances like medical expenses, divorce or death of a spouse are the cause, there probably wasn't much you could have done to prevent it.
However, if you take an honest look and find that uncontrolled spending and lack of a workable budget were to blame, you can change that.
The sad thing is there are relatively few programs offered for financial education in our school systems and people aren’t born knowing how to do this.
That’s why it’s now a requirement that you have pre-bankruptcy counseling and post-filing debtor education. The more you’re prepared beforehand, the more you’ll get out of these programs.
You will have to complete a pre-bankruptcy counseling session from a government-approved organization within 180 days before you file. This session will generally take between 60 and 90 minutes and can be done in person, over the phone or online.
These companies are required to provide this service free of charge if you are unable to pay and request it. However you must ask for a fee waiver before the session begins.
You are also required to get a certificate of proof of counseling to present to the court that will handle your case.
After you file but before your debts are discharged, you will be required to take a debtor education course and present a certificate of proof of this as well. This session will cover things such as budgeting, money management, and credit and will likely take between 2 and 2 ½ hours.
Like the pre-bankruptcy counseling, they are required to provide this service free of charge if you’re unable to pay. Again, make the arrangements and obtain a fee waiver before you begin.
Chapter 7, often called a “straight bankruptcy” is the simplest and quickest. In Chapter 7, you will be required to turn over certain non-exempt assets to the trustee for liquidation.
You will have to file a schedule of exempt property with the court. The definition of exempt and non-exempt property varies by state so it’s important to have an experienced personal bankruptcy attorney on your side.
The proceeds will then be used to pay your creditors. Assuming your assets don’t cover the total amount owed, you will be entitled to some discharge of debt.
However, there’s a catch. The rights of secured creditors will generally continue even after the debt has been discharged. This means they could still re-possess your property after the personal bankruptcy. You can reaffirm these debts and work them out individually with your creditors if you so choose.
There are also other debts that will generally remain after the discharge. These include taxes, child support, student loans and court fees. Talk with your attorney to find out what debts will likely be left when it’s over.
Chapter 7 can only be filed once in every eight year period. There will also be a “means test” to determine if you’re eligible. Chapter 7 is for those who truly don’t have the means to pay their bills. And this test is designed to ensure those with higher incomes don’t abuse the system.
If your current monthly income is less than the median income for a household your size, in your state, you pass. If you don't pass the means test, your case will be dismissed or converted to a Chapter 13.
Under Chapter 13 you get to keep all your assets and your debts will be restructured over a period of three to five years. To qualify for Chapter 13 you will need a regular source of income with a debt load that doesn’t exceed certain limits.
You will propose a feasible re-payment plan and need to comply with all the requirements of the court. If you're approved, the court will confirm the plan and both you and your creditors will be required to follow it. Creditors typically have no say in how funds are disbursed although secured creditors will usually receive more than the unsecured ones.
Payments will generally be made to the trustee who will disburse the funds according to the re-payment schedule. When you have completed the schedule as outlined and have made all payments in a timely manner, the court will discharge the remaining debts according to the plan. Any new debts incurred after filing will not be discharged.
If you fail to make payments or are repeatedly late, the court will dismiss your plan and creditors will regain full rights under state law to pursue you for the balance.
In Chapter 7, Chapter 13 and all other bankruptcies, you are provided an automatic stay. The stay begins at the time the petition is presented for filing. This means that when you are under the stay all harassment, collection efforts, evictions, lawsuits, garnishments and utility shut-offs will be halted.
The automatic stay is temporary and can be modified or terminated at a later date. It’s designed to give you some breathing room while the details of your plan are sorted out.
If you’re currently being harassed by creditors, this part alone may make the thought of filing personal bankruptcy more appealing. However, there is a lot to this process and the decision should not be made lightly.
Once your debts have been discharged, the scars of personal bankruptcy will remain on your credit report for 7 to 10 years. However you should immediately start rebuilding your credit since the most recent activity carries the most weight.
You should also have a post-bankruptcy budget to ensure you won’t have to go through this again. Although you will receive debtor counseling, it’s your responsibility to make sure you have a good plan and stick with it. Once you do, you’ll be on the right track to a bright financial future.From Personal Bankruptcy to Debt Reduction