Filing for bankruptcy will get your finances back on track, but the rules can be complicated if you don't understand the bankruptcy process. You'll want to start by learning the following:
Also, be sure to read the frequently asked questions after each section. They're the questions people search for regularly online, so you'll probably find the answers you're looking for, too.
You know there are three primary bankruptcy chapters, Chapter 7, 13, or 11, but if you're like most people, you don't remember what each does. Here are the basics.
If you can't afford to pay anything to creditors, you'll probably prefer Chapter 7. It erases qualifying debt without requiring payments to creditors. Chapter 13 works for filers who earn enough to make payments over three to five years and can help filers stop a foreclosure or repossession. Chapter 11 is similar to Chapter 13, but it's expensive and used mainly by businesses.
The takeaway? You'll likely file for Chapter 7—possibly Chapter 13.
Preparing to file for bankruptcy involves a lot of steps. The first? Find out if you qualify by taking the Chapter 7 means test. Or, if you want to file for Chapter 13, calculate your Chapter 13 repayment plan and see whether you can afford it (but don't be surprised if you need a bankruptcy lawyer— calculating it isn't easy).
Next, check if bankruptcy will wipe out your debts. If the bulk of what you owe consists of credit card balances, medical bills, and personal loans, you'll be in good shape. Otherwise, you'll want to learn about nondischargeable debt, or obligations you can't erase in bankruptcy.
Finally, figure out whether you can keep your property. Chapter 7 filers lose assets not covered by a property exemption. Chapter 13 filers can keep all property, but they must pay for anything an exemption doesn't protect. Getting this step wrong can be costly because while many people can protect everything they own, it's not always the case. Here's where you find out about the property you can protect in bankruptcy.
Don't be dishonest. Don't talk to debt collectors. Don't hide or transfer property for less than what it's worth. Don't pay dischargeable debts with funds you can protect in bankruptcy (such as 401k or other ERISA-qualified retirement funds). Avoiding these things will help you steer clear of some of the biggest mistakes people make before filing for bankruptcy.
After you file, the automatic stay will stop most creditors from collecting from you. The court will set a date for the 341 meeting of creditors—the one appearance all filers must make. (In Chapter 13, you or your lawyer must also go to a confirmation hearing where the judge determines whether to approve your repayment plan.) You'll provide the trustee with documents before the 341 hearing (or file them with the court, depending on your jurisdiction).
At the 341 hearing, the trustee checks identification and asks you questions about your paperwork which you'll answer under oath. Creditors can appear and ask questions, too, but they rarely do. After the meeting, all filers will complete a debtor's management course, and Chapter 13 filers will complete the repayment plan. That's it!
Most filers feel significant relief after receiving a discharge. But a discharge comes with costs. The downsides involved in bankruptcy include having difficulty opening a bank account, leasing a home, and buying a car for a year or two after the filing. So it's essential to plan for these needs before you file your case.
Bankruptcy is an unusual area because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.
One way to keep track of your research is to use the bankruptcy forms as an outline. You'll find links to resources in the chart below. You can also look at the list of Chapter 7 and 13 bankruptcy forms to see where this topic fits in the bankruptcy scheme. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.
We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.