Steps Involved in Filing for Bankruptcy

Recently, more and more Americans are contemplating the prospect of filing bankruptcy to get rid of debts that they would otherwise be unable to repay. The most common reasons people are facing financial distress and looking to bankruptcy protection is a combination of job loss, medical problems and/or foreclosure/mortgage adjustments.

According to many bankruptcy attorneys, the recent housing market decline and mortgage crisis is the number one driver of American financial distress and bankruptcy filings. Bankruptcy offers Americans a way to recover financially and get a financial fresh start that would otherwise be impossible.

Below we've outlined how to file for bankruptcy and the basic steps involved in a bankruptcy case and what to expect during the process.

1. Attend Pre-Bankruptcy Counseling

The first step in getting financial affairs in order is to attend a pre-bankruptcy counseling session. These sessions are designed to inform debtors about the bankruptcy process as well as provide information and advice to help avoid financial trouble in the future.

These counseling sessions take only about an hour or two, and will provide debtors with a wealth of strategies for managing debt and preventing debt and credit problems down the road.

Even if bankruptcy is not filed, pre-bankruptcy counseling is a good way to get the information and tools necessary to make better financial decisions in the future.

2. Consult a Bankruptcy Attorney

It is highly recommended that anyone thinking about bankruptcy consult with at least one bankruptcy attorney early on to help with pre-bankruptcy planning as well as the actual bankruptcy process. While businesses and other non-personal filers are required to be represented by an attorney, personal bankruptcy petitioner may file without an attorney, but the US Bankruptcy Court recommends hiring an attorney:

Having a case represented by a specialized bankruptcy attorney will ensure the petition and hearings are handled correctly, and the petitioner has access to qualified legal advice regarding the best strategies to keep personal property while discharging as much debt as possible.

For a free consultation with several local bankruptcy attorneys, click here, otherwise read on.

3. Choose the Type of Bankruptcy

While there are quite a few different chapters of bankruptcy offering businesses and individuals different types of protection, the vast majority of personal bankruptcy petitioners will file either chapter 7 or chapter 13 bankruptcy.

Chapter 7 "Liquidation"

In a chapter 7 bankruptcy, a bankruptcy trustee will be assigned to your case in order to evaluate all of your assets and property, and liquidate, sell, any property that is "non-exempt".

Chapter 13 Repayment Plan

In a chapter 13 bankruptcy, a trustee is also assigned, however their role is more of a mediator between the debtors petitioning for bankruptcy and all involved creditors. The petitioner must submit a repayment plan to which he or she must adhere and all creditors must accept.

Choosing a Type of Bankruptcy

Both types of bankruptcy have their advantages and disadvantages, and usually income will be the factor that dictate which is most appropriate. While chapter 7 has the appeal of fast relief from insurmountable debt, chapter 13 offers the ability to keep all assets.

Ultimately, a bankruptcy attorney is best positioned to help debtors select the most effective and beneficial type of bankruptcy. Below are some of the key elements of both chapter 7 and chapter 13.[2]

4. Create Legal Strategy

Once the most appropriate type of bankruptcy protection has been chosen, a legal strategy must be outlined before the petition is filed. This strategy should take into account all the property that the debtor wishes to keep (in a chapter 7 case), what payment options are affordable (in a chapter 13), how to best utilize assets before bankruptcy is filed, how to avoid preferential transfers, how to maximize protection of assets, how to save a home from foreclosure lawsuit and avoid a deficiency judgment, and how to make the process go as quickly and smoothly as possible.

Consider Tax Returns

Tax returns are not protected by bankruptcy, however there are some ways to protect tax returns from creditors and the bankruptcy trustee. The most common is to utilize tax returns for court and legal fees.

Cars and Other Big Ticket Property

Most chapter 7 bankruptcy petitioners elect to keep financed and non-financed cars, and have a few options to do so. For cars that are still being paid off, the debt can be "reaffirmed", which means the petitioner will choose to repay that debt as required by the terms of the financing. Additionally, auto loan debt may be "crammed-down" in a chapter 13 to reduce the principle using the current market value of the vehicle. This allows debtors to significantly reduce their car payment. [3]

Importance of Pre-Bankruptcy Planning

Pre-bankruptcy planning and strategy is the most important part of any bankruptcy filing. A good bankruptcy attorney will have a wealth of legal knowledge regarding how to file for bankruptcy strategically in a way that will get his or her clients the best results and allow them to move on with their life after bankruptcy. [4]

One of the most important aspects of pre-bankruptcy planning is utilization of protected assets such as retirement accounts. IRA's, 401k's and other types of retirement funds will be protected by the US bankruptcy court, so it's important that debtors do not use these assets in a last ditch effort to repay debt before filing for bankruptcy.

5. File the Petition

Once a legal strategy has been worked out, the paperwork must be filed with the local bankruptcy court. The bankruptcy petition itself is short, only three pages, but includes several attachments, or "exhibits". Debtors will be given instructions on the purpose of the exhibits, and which are required in a specific case.

Aside from the voluntary bankruptcy petition, there are a series of other forms called "schedules" that must be filed along with the bankruptcy petition. Every case will require different schedules to be filed, but some of the most common are as follows:

Schedule A: Real Property

Real property is listed separately from all other property in schedule A. Real property includes a primary residence owned by the debtor, and any rental or vacation property owned. Basically, all real estate owned by the bankruptcy petitioner.

Schedule B: Personal Property

Personal property includes all property that is not real estate. This would include motor vehicles such as cars and boats, jewelry of value, stocks, bonds and other investments, retirement accounts and all other personal property of significance.

Schedule C: Property Claimed as Exempt

All property that is exempt from bankruptcy should be listed in schedule C. This includes a homestead, or primary residence, certain amount of cash, and usually a primary car. Keep in mind, exempt property varies by jurisdiction.

Schedule D: Creditors Holding Secured Claims

In this schedule, the petitioner must list all creditors holding secured claims such as a car, real estate, furniture, electronics, jewelry and other debt secured by some property.

Schedules E/F: Creditors Holding Unsecured Claims

Unsecured claims generally include credit card debt and personal loans. These creditors have no property "securing" the debt, and as such have nothing to repossess.

Other Information Required

Other information that may need to be filed includes any pre-paid or unpaid contractual obligations, information on co-debtors, income schedule, monthly expenses.

The petition process can be complex due to all the required information and complicated forms. A bankruptcy attorney will be responsible for completing all required paperwork on behalf of his or her client. Alternatively, the are bankruptcy petition preparation services that will complete the paperwork for a fee, but these services should be avoided unless the petitioner does not speak English. These services can only type what the petitioner provides, and cannot offer any advice regarding the bankruptcy filing. [5]

Once all the paperwork has been filed with the court, a bankruptcy trustee will be assigned to the case and an initial hearing will be scheduled.

6. Bankruptcy Hearing(s)

The most simple chapter 7 bankruptcy cases will usually only involve one court hearing. At this hearing, creditors will be present along with the bankruptcy petitioner, and both parties will argue there respective cases.

The creditors may attempt to argue that their claims should not be discharged by the bankruptcy, and that petitioning debtor should be required to repay the debt. A skilled bankruptcy attorney will be able to rebut most of these arguments and get a bankruptcy discharge granted for their client.

More complex bankruptcy cases may involve several hearings in order to get all the creditors arguments rebutted and the case closed. Additionally, for chapter 13 petitioners the repayment plan must be approved by the bankruptcy court and all creditors will be required to adhere to this plan.

See the references for more information on how to file bankruptcy with a lawyer or yourself.

References

[1] US Bankruptcy Court on Filing without a Lawyer
[2] Introduction to Chapter 7 and Chapter 13
[3] Keep Your Car and Lower Your Payment in Bankruptcy
[4] Planning for Bankruptcy
[5] Options for Filing Bankruptcy