Declaring bankruptcy can mean a fresh start!

Melissa Lanier Attorney At LawMany debtors believe declaring bankruptcy is only an option of last resort, but it often represents the best way out of financial peril. The thought of filing bankruptcy can be intimidating, but it doesn’t have to be, and those who see it through are usually able to recover faster and with a much more stable foundation.

A debt relief attorney will remove the intimidation factor from the process while ensuring their client is prepared for each step in the process. An attorney can help debtors protect their assets, expedite their case and avoid the kind of mistakes that could lead to a dismissal of the case.

Who should consider declaring bankruptcy?

There is no clearly defined rule for when bankruptcy makes sense, as everyone’s financial situation is different. In general, though, if it will take several years to resolve the debt, bankruptcy may be the best option. That’s because bankruptcy, even though it remains on the debtor’s credit for up to 10 years, will allow the debtor to get their finances back in order. Chapter 7 bankruptcy, for example, is often resolved within months, which is easier than trying to satisfy several creditors separately.

Many people who consider declaring bankruptcy do so because they are tired of collection attempts. Incessant phone calls, intimidating letters and the threat of a lawsuit can be draining, filing for bankruptcy can put an immediate stop to harassing collection attempts. Although bankruptcy is not a cure-all for a debtor’s financial issues, it provides a stable foundation to attack debt from.

An experienced debt relief lawyer will take a comprehensive look at a client’s financial situation and determine their best course of action.

What happens when declaring bankruptcy?

Declaring bankruptcy is far more than admitting you can’t pay off your debts. In fact, the court won’t even recognize someone filing for bankruptcy until they have completed a couple of steps. This is true whether a debtor is filing for Chapter 7, 11 or 13 bankruptcy.

Both individuals and businesses may file for bankruptcy, though the vast majority of cases (more than 95 percent) are filed by individuals. This is what the process looks like for them:

  1. Submit documentation to the court – Individuals must provide a clear picture of their financial situation to the court. At a minimum, the debtor will need to provide a full compilation of all assets, debts, expenses and income, though the court may request additional information on top of this. Do not withhold any information from the court, as they will find out eventually, and it will almost always lead to a dismissed bankruptcy case.This information will need to be provided before filing for bankruptcy, as the court will need to review it. Only then can they confirm that the debtor is eligible for Chapter 7 or 13.
  2. Take a credit counseling course – This is another step that must be handled prior to declaring bankruptcy, and it is required within 180 days of filing. During credit counseling, the debtor will be informed of bankruptcy’s advantages and disadvantages, as well as possible strategies for reducing debt independent of bankruptcy.Once the course is complete, the debtor will be provided with a certificate that they show to the court. Credit counseling can be helpful, even if it doesn’t eliminate the need for bankruptcy. Courts demand it because they want debtors to exhaust all their options before filing.
  3. File a petition for bankruptcy – This is the official start of a bankruptcy case and if the debtor hasn’t hired a debt relief attorney by now, it’s time to do so. Bankruptcy laws are notoriously complicated and unforgiving to debtors, and even an honestly missed deadline can terminate a case. It’s not worth taking that risk, and the insight that comes with an attorney is invaluable.As soon as the case is filed, an automatic stay is placed, which prevents any creditor from making further attempts to collect on the debt.
  4. Decide on Chapter 7 or 13 – The biggest decision comes down to Chapter 7 versus Chapter 13 bankruptcy, and again, a debtor must prove they are eligible for either one. This is something a debt relief attorney can provide valuable assistance with.Chapter 7 isn’t always the better option, but it’s usually the preferred choice for debtors with few assets to their name. To qualify, the debtor’s income must be low enough that they don’t have the budget left over, following essential expenditures like food, to make meaningful payments to their creditors. If the debtor’s income is above the median for their state, however, and there is some left over after essential expenditures, they will likely have to file for Chapter 13 bankruptcy instead.In some instances, Chapter 13 may be the better choice, especially if the debtor has assets that they want to hold onto. This is something, again, that an attorney will advise their client on.
  5. Attend a meeting with the bankruptcy trustee and creditors – Once the case gets started, the debtor must attend a meeting with a court-appointed bankruptcy trustee and with their creditors. The creditors do not have to be present at this meeting, but they can use it as an opportunity to ask questions about the debtor’s financial situation and outlook.
  6. Liquidate or put together a repayment plan – This is where Chapter 7 and 13 take radically different paths. Chapter 7 is a liquidation process, in that the debtor’s nonexempt assets are sold by the trustee to pay off creditors. Depending on what state the debtor lives in, certain assets may be exempt from liquidation. This includes secured loans, such as mortgages and vehicle loans, some personal property and various items like sporting equipment, jewelry and firearms.Although the debtor will have some say on what will and won’t be liquidated, the process is largely out of their hands. At this point, the debtor will need to stay up on any requests for further information and meet all court deadlines, but the trustee will manage all transactions.Chapter 13 is much different. When filing for Chapter 13 bankruptcy, the debtor must submit a repayment plan to the court. This plan must resolve applicable debts within three to five years and represent the debtor’s “best effort” in paying back what they owe. This typically means that all disposable income must go to the creditors over the repayment plan’s term. Chapter 13 plans must detail how the debtor will pay back creditors, how much each creditor will get, the value of the debtor’s assets and some other items. The plan must be approved by the creditor before it is executed, and creditors do have the ability to submit their own plan if a good faith effort is not made within a reasonable timeframe. In most instances, though, the creditors want to get the repayment process going right away.
  7. Once the case is over, some debts are discharged – While not all debts are discharged following bankruptcy, many are.Following Chapter 7, most debts are wiped out. This includes medical bills, credit card debt, utility bills, business debts, collection agency accounts, auto accident claims and many other forms of debt. What isn’t discharged are most tax debts, student loans, spousal or child support, and any debts accrued after the bankruptcy case was filed.Chapter 13 is similar in the debts it discharges, though it can also be used to reduce the amount owed on some secured debts.

    In both cases, continued payments will need to be made on secured debts to prevent repossession. The secured debt doesn’t have to be paid in full during the bankruptcy case (unless the loan’s term ends during the repayment period), but these debts are not discharged.

What about businesses?

Businesses may file for Chapter 7 if they qualify, and the liquidation process is similar. The company’s assets are sold off to satisfy creditors and the business is almost always dissolved. If there are outstanding debts, however, the business owner may need to file bankruptcy as an individual to avoid liability for those outstanding accounts.

The alternative for a business that intends to keep operations going while they come up with a repayment plan is filing Chapter 11. This is similar to Chapter 13, but includes many stipulations that are only relevant to commercial entities. For example, during Chapter 11, businesses cannot enter into a property lease, sell assets (other than inventory), expand or shut down operations, or sign onto most contracts without first getting approval from the court.

Chapter 11 discharges many of the same debts that Chapter 7 and 13 discharge, though the company will still need to pay back most tax claims, as well as any fines to government entities.

Declaring bankruptcy is not a decision to make lightly, but if managed properly, it doesn’t have to be an intimidating choice either. A debt relief attorney can help make sense of bankruptcy laws and ensure their client is fully prepared for the road ahead.