Entering into bankruptcy is never an easy decision. Sometimes, however, it is necessary to start over and move forward. Over a million cases were processed in federal bankruptcy court in 2011. Debtors know that declaring bankruptcy can affect their ability to obtain credit and loans, but for most, it is a necessary step toward resolving their debts and getting a financial fresh start.
Bankruptcy is a court-supervised process that allows a debtor to divide his assets among his creditors and, in some ways, start fresh or reorganize under a plan. Declaring bankruptcy requires you to provide your financial records. You and your attorney determine which form of bankruptcy you need to declare then complete the necessary forms. Having a lawyer can help you navigate this lengthy process.
That process starts with a list of your outstanding secured and unsecured debts. Secured debts are tied to an asset you posses which the creditor has a lien on, like a mortgage or car title. Unsecured debts do not have any such collateral. Most household goods such as furniture and personal effects are exempt – meaning you can retain them without cost.
You will also need to have a clear understanding as to which debts will be subject to the process. Some debts will not be wiped clean through the process. Student loans and federal tax debt are prime examples of debt that can survive a bankruptcy. Also, an individual’s financial situation will help to determine which type of bankruptcy will be best.
There are several forms of bankruptcy. Some are available only to businesses (Chapter 11) or agricultural businesses (Chapter 12). Personal bankruptcy usually means selecting either Chapter 7 or Chapter 13. Chapter 7 basically settles and wipes out most types of debt. In Chapter 7 bankruptcy, a court-supervised trustee will convert the debtor’s assets to cash and distribute the amount to the creditors. Certain assets, including collateral put up for secured loans, will be exempt from this process. Other assets can be declared exempt and are determined by state and federal law. (An attorney will help you understand which assets are exempt and which aren’t.) Chapter 7 acts as a complete liquidation and is a fairly speedy process. Non-exempt assets will be liquidated and the earnings distributed among creditors. The unsecured debts are then discharged. The entire process can usually be accomplished within six months
Filing Chapter 13 will allow a person to reorganize and have a court-approved payment schedule on a 3 to 5-year plan. Unlike in Chapter 7, you are allowed to keep assets that are not completely covered by an exemption. Payments are usually made monthly or biweekly to creditors over the lifetime of the plan. The debtor is protected from creditors, including such actions as lawsuits and garnishments, over the course of the plan. Under Chapter 13, however, debt is not immediately discharged. The debtor must also maintain the payment schedule, so this option may not be appropriate for individuals who don’t have a regular source of income. The specifics of the plan, including the payment schedule, are determined by the court at a confirmation hearing and must follow the requirements set by the Bankruptcy Code.
Once you and your attorney have determined which type of bankruptcy is better for your particular situation, you will need to file the schedules with bankruptcy court in the area with your petition. If filing a Chapter 13, it is necessary to also submit a proposal for a repayment schedule. A stay preventing your creditors from further contact or claims will begin immediately upon filing. There will then be a meeting of creditors, and a negotiation process begins. Once a decision regarding liquidation or repayment planning is reached, the court will discharge the bankruptcy.
Bankruptcy is a complex and lengthy process, but for some, it is the best available option. Having an attorney assist you in declaring bankruptcy will help make sure that you choose the best plan, declare all available exemptions, and file the appropriate documents–making the whole process as painless as possible.