Various financial problems cause bankruptcy. It could be caused by a sudden death of a sole provider, a severe medical emergency, an unforeseen loss of income source, or it could be because of the pandemic. Sometimes it’s the amalgamation of multiple factors.
Declaring bankruptcy is not easy, but it can also be your only way out. If you consider declaring bankruptcy, we discuss here the ten things you need to know about declaring bankruptcy.
What Is Bankruptcy?
Bankruptcy is a legal process a debtor takes to default on a debt due to the inability to pay an outstanding balance. A person who went bankrupt means that their debt exceeds their assets.
The debtor needs to appear before the bankruptcy court when they want to file for bankruptcy. The court will conduct an investigation or tests (i.e., means test) to identify the debtor’s ability to pay creditors.
After a thorough investigation, the court will declare what will happen next to your case. They will either allow you to establish a repayment plan, sell your non-exempt property, reorganize your business, or give you a bankruptcy discharge.
Bankruptcy filing involves various steps before you reach a court decision. It’s best to seek the counsel of a bankruptcy lawyer before you file for bankruptcy. A lawyer can help you identify which classification of bankruptcy suits your case.
Why Declare Bankruptcy?
There are several reasons why a business or an individual declares bankruptcy. However, it all boils down to their inability to pay a debt due to a bad financial situation.
Major life changes force people to file for bankruptcy. The death of a loved one, a significant medical emergency, and loss of stable monthly income are the most common reasons individuals file bankruptcy.
Some businesses utilize bankruptcy as a tool to help them manage their tax payments. Business owners usually declare bankruptcy to change their debt or tax payment terms.
It’s vital to assess your current finances thoroughly and whether you can clear your existing debt within three to five years. The bankruptcy court may allow you to restructure a debt payment schedule within these years.
Suppose that you cannot settle your debts within five years. In that case, bankruptcy may be your only option for debt relief.
It’s vital to remember that bankruptcy records appear on your credit history for seven to ten years. A bankruptcy record may pose a challenge if you are planning to obtain an S.B.A. or Small Business Administration loan.
How Can Bankruptcy Help Me
The court can help you prioritize your debts when you declare bankruptcy. Furthermore, they can also help you by allowing you to pay your debts within three to five years while you reorganize your business and finances.
The bankruptcy court will identify and categorize your outstanding debts when you declare bankruptcy. The bankruptcy court will sort your debts as a priority, unsecured, or secured debts.
- Secured debts. A secured debt is backed by collateral property. A mortgage or car loan is the best example of secured debt.
- Unsecured debts. Unsecured debt is not backed by collateral property. In most cases, debtors only agree to pay creditors within a specified date. Medical bills, credit card bills, and personal loans are categorized as unsecured debts.
- Priority debts. The court places the utmost importance on debts classified under this category. Child support, tax debts, and income debts are examples of priority debts.
After filing bankruptcy, the court will categorize your case into either one of these three:
- Chapter 7 Bankruptcy. Chapter 7 is also known as the Liquidation Bankruptcy. When filing for a Chapter 7 bankruptcy, you allow a court-appointed trustee to sell your non-exempt assets to pay a creditor.
- Chapter 13 Bankruptcy. Chapter 13 Bankruptcy is also referred to as Repayment or reorganization Bankruptcy. This bankruptcy allows debtors to request changes in the payment schedule to better suit their financial status. The bankruptcy court will enable debtors to repay their debts within three to five years.
- Chapter 11 Bankruptcy. Chapter 11 Bankruptcy is also called the Business Reorganization Bankruptcy. This chapter of the Bankruptcy Code is only applicable to businesses. The court allows business owners to delay a debt deadline or provide them with additional rights to reorganize or improve their business operations.
This is not an exhaustive list of the Bankruptcy Code Chapters. However, 90% of bankruptcy cases fall into either one of these three.
10 Things You Need to Know About Declaring Bankruptcy
At this point, you already know what bankruptcy is, why people declare bankruptcy, and how it can be beneficial for you. Before you jump into any action, here are ten things you need to remember when filing for bankruptcy.
1. There Are Two Common Types of Personal Bankruptcy
Bankruptcy cases are either Chapter 7, 11, or 13. However, Chapter 11 is only applicable for business bankruptcy.
Individuals who want to declare personal bankruptcy can choose between a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.
You must identify which Chapter of the Bankruptcy Code applies to your situation with your lawyer. The court may conduct an investigation or a test to verify your eligibility for a specific personal bankruptcy chapter.
- Chapter 7 bankruptcy. The bankruptcy court uses a ‘means test’ to assess your financial capacity to pay back a creditor.
- Chapter 13 bankruptcy. This chapter is only applicable to individuals with less than $1,184,200 in secured debt and less than $394,725 in unsecured debt. This is indicated in 11 U.S.C. § 109(e).
2. Consider Other Alternatives Before Filing for Bankruptcy
You must remember that filing for bankruptcy should be your last resort. There are financial assistance alternatives applicable to your situation. It’s vital to check them out first before you file for bankruptcy.
- Complete credit counseling. The law requires you to undergo credit counseling at an accreditedcredit counseling agency before filing for bankruptcy. Credit counseling helps debtors manage their personal finances and debts. In addition, a credit counseling agency may negotiate a repayment plan with your creditor or reduce fees.
- Government initiatives. There are a lot of government initiatives to help debtors avoid bankruptcy. The law allows debtors to seek mortgage forbearance if they face an enormous mortgage debt. Your lawyer can help you find government debt assistance programs to avoid filing for bankruptcy.
- 401(k) loans. The law allows debtors to take out a portion of their 401(k) to help them pay their loans. Last year, the government allowed individuals severely affected by the pandemic to withdraw $100,000 or 100% from their 401(k) plan.
A consumer bankruptcy attorney can help you identify viable options to settle your debt. Bankruptcy should never be your go-to solution at times of great financial burden.
3. Don’t Drain Up Your Retirement Account or Go on a Spending Spree
If you plan to file a bankruptcy claim, try not to take out a considerable debt within 70 to 90 days before declaring yourself bankrupt.
Unless the vast debt was necessary or you will use it for an emergency, the court can deny your claim and declare your case fraudulent. Furthermore, transferring a property to a relative before filing bankruptcy can also be considered an act of fraud.
Although withdrawing your retirement funds is a viable option to settle debt, it shouldn’t be your first option. In most cases, your retirement funds are protected by the law.
Remember, filing for bankruptcy can provide debt relief. This means that you don’t need to exhaust your retirement savings to pay your outstanding debt.
4. You Cannot Shake Off All Your Debts in Bankruptcy
Don’t expect the court will waive all your debts after filing bankruptcy. Certain debts, such as priority debts and student loans, are hard to shake off.
Priority debts such as child support, tax, and income-related debts are not discharged in most bankruptcy cases. The law will mainly require debtors to pay these debts despite the situation.
Furthermore, exempting student loans is a tedious process. Often, these loans are not suspended even when you file for bankruptcy. The law will only waive a student loan if you can prove you are experiencing an ‘undue hardship.’
With secured debts, your creditors reserve the right to claim your collateral property. In contrast, most unsecured debts are waived-off with a bankruptcy claim.
5. You Can Keep a Certain Amount of Exempt Property
When you file for bankruptcy, you could lose some, if not all, of your personal property. The court will determine which properties will go and which you can keep.
In Chapter 7 bankruptcy, the trustee will sell all your non-exempt property to pay most or all of your creditors. With Chapter 13, the law will require you to pay your creditor the same amount of your non-exempt asset through an alternative payment plan.
Some states may have additional regulations in filing bankruptcy or keeping a property during bankruptcy. Take Virginia, for example. In Virginia, debtors over the age of 65 or veterans may exempt up to $10,000 for their personal property.
There are also states which allow debtors to choose between state exemptions or federal exemptions. You need to consult with a local legal expert to verify these state-specific regulations.
6. Bankruptcy Can Take More Time
Filing bankruptcy is not a quick fix for your debt problems. In fact, Chapter 7 bankruptcy has the fastest turnaround time of four to six months. Chapter 13 might take around three to five years before you are declared debt-free.
The timeline of the Chapter 7 bankruptcy process is outlined below:
- Case filing. You and your lawyer will initiate a Chapter 7 Bankruptcy claim by filing a case to the bankruptcy court.
- Personal Financial Management. Anytime between the creditor meeting and the initial filing of your case, you will need to complete a personal financial management course.
- Creditors meeting. The creditors’ meeting usually takes place 30 days from your filing date. Creditors can announce their objections within 30 to 60 days from the meeting date.
- Discharge date. You usually have to wait up to two months until the duration of the creditor’s objection has passed. If your case received no complaint from your creditors, the law would give you a discharge date.
- Case closed. The trustee will declare the case is closed. It’s also possible for a case to complete even if the trustee cannot claim any non-exempt property from the debtor. In this case, the trustee will file a ‘Report of No Distribution’ to inform creditors that the case is no asset.
The timeline of the Chapter 13 bankruptcy process is enumerated below:
- Case filing. You and your attorney will initiate a Chapter 13 Bankruptcy claim by filing a case to the bankruptcy court.
- Documents to the trustee. The trustee may require additional documents from the debtor once they file a Chapter 13 bankruptcy.
- Creditors meeting: The debtor will present his plan before the creditors. During the meeting, the creditors may object to the debtor’s plan if it’s not feasible.
- Plan confirmation and duration. The court will approve the plan if the procedure receives no objections from the creditors 30 days after the meeting. After confirmation, the debtor has about 3 to 5 years to complete the payment plan.
- Discharge date. Once the payment is complete, the debtor will submit a final report to the court. This report will outline how the debtor completed his debts, and creditors can issue a complaint if they see any discrepancy with the report.
- Case closed. After approval of the final report, the trustee will declare the case closed.
7. Bankruptcy Is Expensive and Complex
Bankruptcy cases are often complicated and ironically expensive. Filing bankruptcy cases requires you to submit countless forms and recover various documents.
Failure to provide the required documents and missed payments could put your case at risk. A trustee or the court can deny a claim for these reasons.
Hiring an experienced bankruptcy lawyer can help you keep the ground running and ensure that you will never miss any case deadlines. However, hiring an attorney will subject you to paying the attorney fees.
The attorney’s service fee varies for every lawyer. Most lawyers offer a free case consultation. You must take advantage of this offer to assess the skill set of your prospective lawyer.
Keep in mind that you still have to pay the filing fees. These fees vary depending on the nature of your case. In general, a Chapter 7 bankruptcy would cost slightly more than a Chapter 13 bankruptcy.
8. The Bankruptcy Process Requires Complete Honesty
You must remain honest about your assets, debts, liabilities, income, etc. The court can deny your case or, worse, charge you with perjury when they discover that you are withholding vital and truthful information.
In addition, the court may also issue a bankruptcy fraud case against you. Bankruptcy fraud is a felony federal offense. Convicted defendants can face a penalty fine of up to $250,000 and a 5-year imprisonment sentence.
9. Your Financial Situation Will be an Open Book for Everyone to See
Debtors who file for bankruptcy should be prepared to share their financial situation with the public. All bankruptcy claims are considered public records by the court. In addition, your trustee will also hold a public forum for creditors. During the discussion, your trustee will ask you questions pertaining to your personal finances.
10. Bankruptcy Stays on Your Credit Report for up to 10 Years
A bankruptcy record will appear in a debtor’s credit history for about ten years in most cases. During these years, a debtor may find it hard to apply for loan approvals in the future.
Moreover, applying for an S.B.A. or Small Business Administration loan is more challenging when you have a business bankruptcy record in your credit history.
Filing for bankruptcy also has its limitations. For example, a debtor with a Chapter 7 bankruptcy record can file for another bankruptcy after eight years. In contrast, a debtor with a Chapter 13 record can only file another bankruptcy case after six years.
Steps in Filing for Bankruptcy
Here’s an overview of what you need to do when you file for bankruptcy:
- Gather financial records. Before you can file for bankruptcy, you need to gather your financial documents first. You need to compile records of your income, expenses, liabilities, and assets. This will help you prove your financial challenge to the court.
- Credit counseling. Another crucial step when filing for bankruptcy is seeking counsel from approved credit counseling agencies. This ensures the court that bankruptcy is the best option for your situation.
- Bankruptcy petition. After the credit counseling, you and your lawyer will now file for bankruptcy. Your lawyer can help you complete all the necessary paperwork in time.
- Creditors meeting. When the court receives your case, they will appoint a bankruptcy trustee to take your case. The trustee will schedule a public forum for you and your creditors. You will have to clarify any questions your creditors have for you.
Bankruptcy Attorney Near Me | Contact The Law Offices of Emil Fleysher to Speak With a Bankruptcy Attorney for Free
Our experienced bankruptcy attorney at the Law Offices of Emil Fleysher has helped thousands of debtors find a fresh start from their insurmountable debts.
Our principal bankruptcy lawyer is proficient in Chapter 7 and 13 Bankruptcies, Debt Settlement Cases, Foreclosure Defense, Loan Modification, and Short Sale Cases.
Call us now at 888.886.0020fora free legal consultation. You can also submit your consultation request using our online contact form. Drowning in debt? We can lend a hand!