Are you considering filing for bankruptcy sometime this year? You wouldn’t be alone. According to Market Watch, there were 452,797 filings in the first seven months of 2019 with most of those happening early in the year. It is surprisingly easy to find yourself in a tough financial situation especially if you are low income, have lost a job, recently divorced or widowed, experienced a natural disaster or had to deal with expensive health issues. If you have found yourself in a position where bankruptcy seems to be the only relief for your situation here is some information that can help you through the process.
There are two types of bankruptcy for individuals and small business, chapter 7 and chapter 13. It depends on your financial situation as to which one is going to work best for you. Any unsecured debts including credit card, personal loan, and medical debt can be part of a chapter 7 or 13 filing. Secured debts such as mortgages and vehicle loans, money owed the IRS, child support and student loans can’t be discharged in bankruptcy, however in Chapter 13 filings certain types of loan amounts could be reduced.
Chapter 7 bankruptcy is the most common for individuals and sole proprietor businesses with low income that do not have the ability to pay back all or some of their debts. It’s known as ‘liquidation’ bankruptcy and income has to be either below the median level for your state (https://www.justice.gov/ust/eo/bapcpa/20190501/bci_data/median_income_table.htm) or be low enough to pass the ‘means test’ in order to qualify. The test determines if you have either enough assets to sell or disposable income available after covering essential living costs to pay back some of the debt. If your ability to pay is too high you will be required to choose a chapter 13 filing. If you qualify for chapter 7 a trustee will be appointed to your case and your assets will be sold off to help pay some of your creditors. Once the money is gone the rest of the debt is discharged.
In this type of bankruptcy typically your primary home and vehicle are protected if they aren’t extravagant and the equity you hold is below a set amount. Other exclusions include health aids, valuable personal items up to a specific limit, and your 401 (k) and retirement accounts. Any other assets, properties, vehicles, high-equity homes and investment portfolios can be sold or repossessed. It also doesn’t always stop your mortgage lender from foreclosing on your property anyway after the fact. This process typically takes 3 to 5 months and can only be done once every 8 years.
Chapter 13 bankruptcy is referred to as a reorganization bankruptcy. This type of bankruptcy is available to individuals or sole business proprietors who still have a regular income and who’s unsecured debts (credit card, medical debt, personal loans) are lower than $395,000 and total secured debt (home, vehicles, inventory) under $1.19 million. Your property and assets are not sold, but your debt is restructured, sometimes lowered, and you have a court-mandated repayment plan put in place through an assigned trustee who will receive your payments and pay your creditors. They will make sure that you follow your repayment plan. If you successfully complete the plan any remaining debt is discharged and you’re not required to pay anything more back to your debtors (though you can still choose to do so). This process typically takes 3 to 5 years.
Do I need a lawyer?
Once you decide to file you should consider hiring a bankruptcy lawyer to help you determine your best plan moving forward and help you navigate through the paperwork needed, but lawyers may cost money you don’t have. Lawyer fees can range from $1,000 to $5,000 depending on the type filing, the information and footwork you can provide to reduce the fee, and the complexity of the case in general.
While having an experienced lawyer will make the process much easier for you, with a little studying and footwork you can take care of a bankruptcy filing on your own. There are documents which you will be required to fill out and file with your local court and they may vary slightly by state. Those are typically provided on the court website in your county or state of residence, but you can also find a general list of U.S. Court forms here: (https://www.uscourts.gov/forms/bankruptcy-forms). If you are filing for Chapter 13 you will also have to file a potential repayment plan for your debt. A court appointed trustee will review your plan and discuss it with your creditors before approving a final plan.
Mandatory Credit Counseling
In addition to preparing paperwork those filing Chapter 7 bankruptcy are required to receive credit counseling and take a debtor education course during the six-month period before filing. The counseling agency must be approved by the U.S. Trustee’s Office. Family Financial Education Foundation is a certified provider of pre- and post-bankruptcy education and can help you with this requirement. Here is information on our program: http://www.ffef.org/services-bankruptcy.php. Our counselors are ready to help you get started. At the end of your training you will receive a certificate of completion which will also be needed by the court.
Paperwork
Completed papers will then be filed at your local court office. If you are unfamiliar with the location of your closest court you can find it here: (https://www.uscourts.gov/federal-court-finder/search). There is a filing fee of $335 for Chapter 7 and $310 for Chapter 13 due at the time of submission, however you can work with the court on a payment plan and in some cases, you can apply to have the fee waived. Once papers are filed there is an immediate stay put in place to stop most creditor collections.
After your paperwork and tax filing information is reviewed by a trustee of the court there will be a meeting facilitated between you and any of your creditors who may show up (often they don’t) called a ‘341 Meeting’. You will be required to answer questions about your financial situation under oath. Generally, this meeting is short. After the meeting the decisions will be made on how to handle the return or sale of any existing assets if it’s Chapter 7, or the repayment plan will be put in place if it is a Chapter 13.
Mandatory post-bankruptcy counseling
Between filing the paperwork and before you get your discharge you will also have to complete a second debtor’s education post-bankruptcy course and file Form 423 Certification About a Financial Management Course, with the court. Again, FFEF is fully certified to help you with this course and any questions that may arise.
Life after bankruptcy
Your bankruptcy paperwork including discharge information if it was a Chapter 7 will arrive in the mail three to six weeks after you file. You will either no longer be liable to most or all of your creditors, or with Chapter 13 will have a structured repayment plan in place under which your creditors should no longer be bugging you all the time.
Unfortunately, this still may not stop some of the old creditors from trying to collect using shifty debt collection practices, or from selling your debt information off for a fraction of the amount owed to another company so that they can attempt collection. Collection calls may continue for years and can get complicated if there are a number of creditors playing this game. It is important for you to understand your legal rights once your case has closed and what rights you have under the Fair Credit Reporting Act (FCRA) https://www.consumer.ftc.gov/articles/pdf-0096-fair-credit-reporting-act.pdf. You should also keep a close eye on your credit reports in case any of these illicit collection agencies inaccurately report your information. If you find that creditors won’t leave you alone you can take legal action against them and you have a good chance of winning.
You should also work to stay pro-active on your financial health moving forward.
- Maintain your job and work skills
- keep to your budget
- make bill and loan payments on time
- build up an emergency fund for future surprises that can start the bad spiral over again
- start a savings account for future purchases
- continue credit counseling
- stay smart by reading financial tips from the many sources available online.
Finally, you can start rebuilding your credit. You can do this through secured credit cards, being added as an authorized user on someone’s credit card, taking out a auto loan which are relatively easy to get though loan interest rates will be higher, or having a co-signer with good credit help you with larger needs. Even with a bankruptcy on your credit you can start seeing your credit score improve in as little as a year later if you are smart about it.
No one expects to have to file for bankruptcy, but if you find yourself in that position please give us a call. Our trained counselors can help you navigate the process and get you started on the path to a happier financial future. www.ffef.org