Detailed Steps to Filing a Bankruptcy

Preparing to file a Bankruptcy is about as much fun as filing out a mortgage application and doing your taxes at the same time.  But if you need to file, there is no better use for your time than doing a good job preparing to file.  Nothing you can do will benefit you more right now.

 

It is very important to be accurate and realistic in your preparation.  Bankruptcy is a Federal Court procedure that is highly regulated by Congress, the U.S. Department of Justice and the Federal Court.

 

Not only is being truthful and accurate the law, it's also a great idea!  Part of this process is to help you figure what happened and ensure you don't have to do this again. In the Resource page of this website is a Household Income and Expenses spread sheet.  It goes into detail about where your money is going and how you can help keep it from going away. 

 

Remember, a debtor is the person who owes the money and files the bankruptcy. The creditor is the person/institution to whom the money is owed.

A.  Organize your information 
The best way to make this a relatively painless process is to do a good job of organizing your information.  If you do forget to put some information on the petition, the Clerk of the Bankruptcy Court will charge extra to add it later.  

 

To help you organize, I have a Bankruptcy Worksheet you can download and print.  Once you have done that, you should listen to the audio file (located in the section above) which explains page-by-page  the information the Court is looking for.  Many parts of Bankruptcy may not seem logical, so it is important to either listen to the recording or to come into the office for a free consultation so I can go over it with you.  Please don't try to fill out the worksheet until you have heard the recording or have come in to the office.

1.  Gather your creditors 
A creditor is anyone to whom you owe money.  This also includes anyone who thinks you owe them money, even if they are wrong.  They all have to be listed.  You have to tell the judge who you owe, even if you want to keep paying them like with your house or car. Gather your most recent bills and get a credit report just to make sure.  You can get a free credit report at www.annualcreditreport.com  For each creditor you will need the name, address, account number, the year account was opened, and the approximate balance.

2.  Inventory your assets 
Anything you own is an asset.  One of the basic ideas of bankruptcy is that some assets are protected and some are not.  Each state has a different set of exemptions. In exchange for discharging your debts, you may have to give up some of your non-exempt assets or pay the Trustee money if you want keep everything. Part of the process is to tell the Court what you have and how much it is worth.  Listen to the Worksheet audio for tips on how to value your assets.

 

3. Calculate your income and expenses 
Your household income will in part determine what kind of bankruptcy you file.  The Court needs to know your average income and basic living expenses.

 

B.  Determine the Chapter 

     Chapter 7:  Liquidation of Debts and Assets - In Chapter 7, all debts are discharged, meaning erased, except those that the person wishes to keep.  If you want to keep your car, you have to keep your car payment.  Likewise, if you want to keep your home, you have to keep your house payment.  If a person is only a few months behind on their mortgage, Chapter 7 can be used in a "work-out" situation.  A Chapter 7 can leave a person with only their basic living expenses.  Other debts, like credit cards, doctor bills, and even some taxes, no longer need to be paid, thus freeing up money to catch up with the mortgage payments.  It is sometimes possible to enter into a " reaffirmation agreement" that modifies the terms of the mortgage and makes it more affordable.  One thing a Chapter 7 cannot do is force creditors into a repayment plan.  So, if the mortgage payments are too far behind, and the lender doesn't want to deal, a Chapter 13 would be a better option. 

 

If you have mainly consumer (not business or investment) debt, a "means test" will determine if you can file a Chapter 7.  While there are some exceptions, if your income is over the amount allowed for your family size, you have to file a Chapter 13.  

 

     Chapter 13:  Reorganization of Debt  - Chapter 13 is a reorganization of debt.  Creditors are divided into groups including "secured" and "unsecured." A secured debt has collateral or security.  On a car loan, the car is the security.  If you don't make the payments the loan company can come and repossess the car.  In the case of a mortgage, the house is the collateral.  If you don't make the house payments, they can file foreclosure.  Unsecured creditors include credit cards and doctor bills and have no collateral or security. 

 

In a Chapter 13 case, regular payments must usually be made through the court to secured creditors if the person wants to keep the collateral, meaning the house or the car.  If the person is behind in their payments, the amount they are behind is put into a payment plan and spread out up to 60 months. For example, if a family's regular mortgage payment is $2000, and they are five months behind, the arrearage is $10,000.  In Chapter 13, they would pay their regular payment of $2000 plus $167 per month (10,000 divided by 60 = 167).  As long as they make the payments in the Chapter 13 payment plan, the lender cannot foreclose. File Chapter 13 to force the mortgage company into a payment plan to get caught up. 

 

Lien Stripping

It is also possible to eliminate the second mortgage if it has no equity.  If the first mortgage is greater than the value of the house, subsequent liens like second mortgages and home equity lines of credit can be stripped away because they are no longer secured by equity. Unsecured creditors usually get a small percentage of the total they are owed. 

 

C. Pre-Bankruptcy Credit Counseling

Before a bankruptcy can be filed, the debtor must attend "pre-bankruptcy credit counseling" with an approved agency.  This to ensure the debtors know about any options they may have other than bankruptcy.  A certificate of completion of the credit counseling must be filed with the Court at the time the bankruptcy petition is filed.  The cost of the counseling can be anywhere from $10 to $20 per person, depending on the agency.

 

D.  Gather your Documents

Part of every bankruptcy petition is a six-month financial history of the debtor.  The Trustee appointed to the case can ask for more information, but below is the usual list:

1. Tax Returns: two years for a Chapter 7; three years for a Chapter 13

2. 6 months of pay stubs or proof of income

3. Certificate of Pre-Bankruptcy Credit Counseling

4. Bank Statements

 

E. Prepare the Bankruptcy Petition

All the information mentioned above is put into the official forms known as the bankruptcy petition, schedules, and statements. It usually ends up being 50 - 60 pages long and must be signed in several places under penalty of perjury. In a Chapter 13 case, a proposed payment plan is calculated, prepared and filed. The petition is probably the most detailed and technical document you will ever sign.

 

F. File the Case

Once the petition and all attachments are filed with the court and the filing fee is paid, an injunction called the "automatic stay" goes into effect that prohibits any creditor from taking any collection action without the permission of the Bankruptcy Court. Normally the automatic stay is in effect from the filing date until the discharge date. The discharge is when the judge signs an order ruling that the debts are discharged or uncollectable.

 

After the Filing of the Petition (Post Filing)

 

The "341" or Meeting of the Creditors

About a month after the case is filed, a "341" or Creditor's Meeting is held. They should change the name; creditors rarely attend.  It should be called the Trustee's Meeting. A Trustee is appointed to administer the "estate." The Trustee's job is to conduct the 341 meeting, swear in the debtors, and examine them about the information in the petition.

 

If in a Chapter 7 case the debtors have more assets than they are allowed, they must either turn something over or pay the Trustee who then makes a distribution the creditors. In a Chapter 13 case, the Trustee's job is to collect the monthly payments and distribute money to the creditors according to the "Chapter 13 Plan.” At a Chapter 13 meeting, the Trustee usually only discusses the details of the Plan that has been filed with the Court.

 

Most 341 meetings take only 5 minutes and are very low key. Most of the time my clients ask me as we are leaving the hearing room, "That was it? That was all?" The better the preparation to file, the easier and shorter your creditors meeting will be.

 

Chapter 7

If the Trustee does not find assets to be distributed, a "No Asset" report is filed, and the case will normally close two to three months later. If the Trustee is able to collect money or assets, all creditors are notified and a distribution is made based on the Proof of Claim filed by each. An asset case can last well over a year.

 

Chapter 13

The first Chapter 13 Plan payment is due 45 days after the case is filed. Creditors are given the opportunity to file a Proof of Claim if they want to receive money from the plan. Several months later, a Confirmation Hearing is held. The Judge will review the proposed Plan with the Trustee, the Debtors, the Debtor's attorney, and any creditors who wish to appear. The confirmed plan can last up to 60 months. The Judge will sign the discharge after the successful completion of the Plan.

 

Debtor Education

Within 90 days of the filing date, the Debtors must attend a three-hour Debtor Education Class that teaches the basics of personal finances. This can be done in person or online. Most of the agencies that provide Pre-Bankruptcy Credit counseling also provide the Debtor Education Classes. In Orlando, the Chapter 13 Trustee provides this class free of charge after the 341 meetings.