Declaring bankruptcy is a very common legal resource when the amount of debts exceeds the ability of a person or company to pay. For each case and circumstance, there are different modalities stipulated in the United States Bankruptcy Code.
Filing for bankruptcy in the United States has its long-term consequences, and they are far-reaching. Therefore, it is not a decision to be taken lightly. In this article, we will show you everything you need to know about filing for bankruptcy in the United States as well as its consequences and the impact it can have on your financial life.
What is bankruptcy?
Bankruptcy is the legal proceeding involving a person or business that is unable to pay outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and appraised, and the assets may be used to pay a portion of the outstanding debt. Filing for bankruptcy in the United States is handled in federal court under the rules of the United States Bankruptcy Code.
Bankruptcy offers an individual or business the opportunity to start over by forgiving debts that simply cannot be paid while offering creditors the ability to obtain some measure of repayment based on the individual’s or business’s assets available to them. liquidation.
In theory, the ability to file for bankruptcy can benefit the economy at large by giving individuals and businesses a second chance to access consumer credit and by offering creditors a measure of debt repayment. Upon successful completion of bankruptcy proceedings, the debtor is released from debt obligations incurred prior to filing for bankruptcy.
Making the decision to file for bankruptcy
Consider other options
Bankruptcy should be your last resort. Before you file for bankruptcy, try all of the other options available to you to pay off your debts. Talk to your creditors and try to negotiate a deduction or a more convenient payment plan. Alternatively, you can try to sell your assets to cover the debt.
You might consult a nonprofit credit counseling organization to help you get your accounts in order and see if that way you can avoid bankruptcy.
analyze your debt
Certain types of debt cannot be canceled or erased, even if you file for bankruptcy. Classify all your debt and calculate how much falls into the categories that cannot be discharged. If most of your debt cannot be eliminated, then bankruptcy may not be the right option for you. Keep in mind that each state has specific provisions for assets that are exempt from bankruptcy. Be sure to check state law. The following types of debt cannot be eliminated in bankruptcy:
- Child support
- Debts that arise after you file for bankruptcy
- Some debts incurred in the six months prior to filing for bankruptcy
- Fraudulently Obtained Loans
- Personal injury debts for driving while intoxicated
- Debts for intentional and malicious injuries to persons or property
- Some student loans
- some taxes
- Secured loans, as lenders can foreclose on your capital
Property exempt from seizure
Although the bankruptcy proceeding will attempt to seize and sell your valuable assets to pay off creditors, there are some assets that are protected by state law. The exempt assets will depend on the type of bankruptcy you are filing for and the laws of your state. Assets can be fully protected or protected up to a certain value. For example, there may be a $5,000 exemption for cars, which means you can keep a $4,000 car but not a $20,000 car.
Protected common property includes cars, wedding rings, and your home.
Some states may offer “wild card” exemptions that allow you to keep any other valuable property up to a certain amount.
Chapter 13 of the bankruptcy code allows you to keep all of your assets, but you can reduce your liability to creditors by selling assets of significant value.
Bankruptcy does not relieve debt
A co-signer agrees to pay your debt in the event that you are unable to pay it. For example, your father may have signed a car loan for you when you graduated from college because you had little or no credit. However, if you file for bankruptcy, the cosigner on your loan is still legally obligated to pay your debt. For example, your parent will have to pay back all or part of that loan, even if you file for bankruptcy.
Different types of bankruptcy
The United States bankruptcy code identifies several different types of bankruptcies. These are usually referred to by their chapter in the United States bankruptcy code.
Individuals and businesses can file for Chapter 7. Property can be liquidated to pay off creditors.
The secured debt can be discharged, or you have the option of allowing the property to be repossessed or paying the creditor a lump sum equal to the current value of the property. Your income must be below a certain level to qualify for Chapter 7.
Chapter 13 is also known as “wage earner” bankruptcy. Under Chapter 13, if you have a reliable source of income, you can propose a payment plan to your creditors that pays them back over the next three to five years. Your debts must be less than $1,149,525 in secured debt and $383,175 in unsecured debt. Keep in mind that the amount creditors receive is based on your income after bankruptcy, not the amount of debt.
Municipalities, such as cities, towns, villages, tax districts, municipal utilities, and school districts can reorganize under Chapter 9.
Businesses can be reorganized under chapter 11 or liquidated under chapter 7.
Chapter 12 is similar to Chapter 13. It is reserved for businesses in which 80% or more of the debt is from the operation of a family farm or similar.
The consequences of bankruptcy
Bankruptcy’s impact on your credit is largely determined by how good your credit score is. If it’s high, it will probably take a big hit and drop significantly. If your credit is already bad enough, bankruptcy may not lower your score much.
The more accounts associated with the introduction, the greater the impact on your credit score.
If you file Chapter 7 or 11, it will stay on your credit report for up to 10 years. If you file for Chapter 13, it can stay on your report for up to seven years.
A Chapter 11 bankruptcy will stay on the business’s credit report, not the owner’s unless a personal bankruptcy is filed.
What is chapter 7 bankruptcy?
Consider Hiring a Bankruptcy Lawyer
To file for bankruptcy in the United States, it is not necessary to hire a lawyer, but we recommend it. Filing for bankruptcy is a very complicated process and you can rarely be successful without the help of an attorney. Free legal services are available for those who cannot afford an attorney. Contact the American Bar Association or the Legal Services Corporation.
Filing without an attorney is called a ‘pro se’ filing. If you decide to file pro se, the court may allow non-lawyers to help you. They can only help you with the paperwork. They cannot answer legal questions or provide legal advice. Since they do not represent you, they cannot sign anything on your behalf or receive payment of court fees.
The United States has 90 bankruptcy districts, each with a bankruptcy court. Each state has at least one or more districts.
Make sure you can qualify for Chapter 7 bankruptcy
To file for Chapter 7 bankruptcy, your income must be below a certain level. If you have any income left over after paying your monthly expenses, then you should file Chapter 13 and make arrangements to pay your creditors.
Take the “means test” to find out if you qualify for Chapter 7. Complete all three forms to take the means test. Your answers on the first form determine whether or not you need to complete the other two.
Download Form 22A-1 from the United States Court website. The form takes you through the steps to calculate your income and compare it to the median income in your state for the same household size. If your income is below the state median, then you qualify for Chapter 7. Otherwise, continue with Form 22A-2.
Download Form 22A-2 from the United States Court website. The form takes you into a deeper analysis of your income to determine if you qualify for Chapter 7.
Complete Form 22A-1Supp to determine if you are exempt from the means test because most of your debts may be for business expenses or you may be coming from recent military service.
Fill out bankruptcy forms
Once you know which chapter of the United States Bankruptcy Law code you can apply to , then you are in a position to fill out the relevant bankruptcy forms.
On the forms, you will need to list all of your assets, debts, income, and expenses to the court. You must complete a large packet of forms. You can download them from the United States Court website.
All debts must be listed for discharge; Failure to list a debt may mean that it continues after bankruptcy.
File bankruptcy forms
Filing the forms officially starts your case. If you hire an attorney, he or she will file the forms for you. If you represent yourself, then you can take them to bankruptcy court yourself.
The court will assign you a trustee when you file the forms. The trustee works on behalf of your creditors. This person is responsible for verifying the information in your bankruptcy documents. The trustee also reviews the assets you own and determines how much you can keep. Each state has rules that govern what property is exempt from liquidation in a Chapter 7 bankruptcy. The trustee determines this for your case and liquidates any non-exempt property.
A bankruptcy judge presides over the bankruptcy court. The bankruptcy judge rules on matters such as eligibility and discharges. A debtor rarely has to appear before the bankruptcy judge. Much of the process is administrative and is carried out by the trustee outside of court.
Credit Counseling and Debtor Education
Anyone who files for bankruptcy is required to receive credit counseling and debtor education. Credit counseling is done before filing for bankruptcy. Debtor education is done after bankruptcy. Completion certificates must be filed with the court before debts can be discharged. Organizations providing these services must be approved by the United States Trustee Program.
Check the Department of Justice for a list of approved credit counseling agencies and debtor education courses.
Attend the 341 meeting
You will need to attend a formal meeting of creditors, which usually takes place at your trustee’s offices. This meeting with creditors is known as the 341 meetings, referring to section 341 of the United States bankruptcy code. This requires debtors to confront creditors so they can answer questions about their debts and property. The meeting will take place about a month after you apply.
During the meeting, the trustee will ask you questions about your debt and why you are filing for bankruptcy. This is where arrangements will be made to sell your non-exempt property. Also, arrangements are made for the property pledged as collateral in secured loans. If you have questions about the process, be sure to speak with your attorney before attending the meeting.
What is chapter 13 bankruptcy?
Make sure you can qualify for Chapter 13 bankruptcy
Read the following items to find out if you are qualified to file for Chapter 13 of the United States bankruptcy law:
- Businesses cannot file for Chapter 13, even if you are a sole proprietor.
- You must have a certain amount of disposable income.
- Your secured debts must not exceed $1,149,525.
- You must be up to date with your income taxes.
- You must prove that you have declared your federal and state taxes for the last four years.
Fill out bankruptcy forms
Chapter 13 forms are the same as Chapter 7 forms. Download them from the United States Court website. List all your financial data. Indicate your income. Value your assets. Enter your repayment plan.
File bankruptcy forms
File your bankruptcy forms with the court. A trustee will be appointed by the court to review your case. Keep in mind, however, that the trustee represents your creditors, not you. This person’s job is to verify your information, check for fraud, and administer bankruptcy proceedings.
Attend two hearings
Within a month of filing for bankruptcy, you will attend a meeting with your creditors. The trustee will arrange this meeting. Here you will answer questions about your debt and negotiate the terms of your payment plan. Shortly after, you will attend a confirmation hearing with a bankruptcy judge who will confirm or not your payment plan.
What does a bankruptcy discharge mean?
If you are granted a bankruptcy discharge, you are no longer legally obligated to pay some types of debts. This is a standing order. Creditors cannot take any other action against you to collect the debt. They cannot contact you to claim the debt. They cannot take any legal action against you. What can happen is that if there is an objection to the discharge, normally it is granted automatically. Creditors, debtors, and their attorneys receive copies of the release order.
When can discharge occur?
This can vary depending on the type of bankruptcy you are filing for. The court may deny a discharge if the applicant fails to complete credit counseling and debt education courses. In some cases, exemptions from these requirements may be granted if the debtor is disabled or in active military service.
In a Chapter 7 case, discharge can occur within 60 days of the first 341 meeting, which is typically about four months from the date the debtor files for bankruptcy. It may take longer if a creditor files a complaint objecting to discharge or a motion to dismiss the case.
In chapter 13 cases, the court grants discharge after the debtor has made all agreed-upon payments. Since these payment plans last three to five years, it can take several years for the discharge to be granted.
Prepare to face debts that cannot be settled
The types of debt that can be discharged vary depending on the type of bankruptcy filed. Congress determines the types of debts that cannot be discharged. These decisions are based on public policy.
Categories of debt that cannot be discharged include some taxes, spousal or child support, personal injury debt, student loans, and DUI debt.
Under Chapter 13 and no other, some debts can be discharged: These include some taxes, some personal injury debts, and debts from property settlements during a divorce. Claimants may also apply for a hardship waiver if they are unable to complete planned payments due to circumstances beyond their control.
Download is not guaranteed
Creditors can object and block a discharge by filing a complaint in bankruptcy court. This is known as an adversary proceeding. The court can deny a discharge if you delay or hinder the proceedings. For example, you will not receive a discharge if you fail to provide proper documents, complete required educational courses, knowingly conceal or destroy records, property, or commit perjury.
A release may be revoked if it is determined to have been obtained fraudulently. This usually happens within a year of discharge.
Consider paying off some debts that went into the discharge
You can choose to pay off some debts that have been paid off. Release debts cannot be legally enforced, but you can pay them voluntarily. For example, if you owe money to a family member, you can choose to pay off that debt. You may also want to pay a debt to someone whose opinion is important to you. An example would be debts for medical treatment from a family doctor.
Keep copies of the download
Keep all court documents and decisions in your files. This will help you prove that the debts have been discharged in case creditors try to collect on old debts. Creditors can sue if they claim debts were discharged dishonestly, so having the papers to prove the court’s decision can be helpful.
Recovering from bankruptcy
Create a budget
Develop a monthly budget with a realistic spending plan. Pay all your bills on time. Stick to your budget at all costs. Avoid accumulating more debt. Save to establish an emergency fund to help you deal with unexpected expenses.
Set up automatic payments to help you pay your bills on time.
Simplify your lifestyle
Adopt a simpler lifestyle. Reduce your living expenses as much as possible. Try to pay less for groceries and housing. Purchase items with cash only. If you filed for Chapter 13, then you are living within a court-appointed budget while working to pay off debts. You will not be able to get a credit card or car loan without the permission of the court.
Get a secured credit card.
Establish a secured credit card by depositing a certain amount of money in a bank account, this helps limit your expenses. Load small amounts to this account each month. Pay the bill on time and as agreed. Secured credit cards help rebuild credit. Some cards may reward responsible payments by increasing the spending limit without requiring an additional deposit.
How bankruptcy affects your credit
It is possible to successfully recover from bankruptcy faster than you think. Even in bankruptcy, you may qualify for an FHA home loan. You will continue to receive credit card offers. You’ll still be able to get other loans, like car loans, at a reasonable rate. Bankruptcy stays on your credit report for up to 10 years. However, your credit score can bounce back quickly if you make all your payments on time.
Check your credit report
You can request a free credit report every year. Review your credit report and check for errors. Make sure debts you no longer owe are not listed. Look for incorrect balances. Review debts that are not yours. If you find an error, file a claim with the credit reporting agency and gather evidence to prove the error they made.