Navigating The Bankruptcy Maze

There is LIGHT at the End of the Tunnel!

Table of Contents

I.  Why Consider Bankruptcy

II. Different Types of Bankruptcy

III. Chapter 7 Bankruptcy

IV.  Chapter 13 Bankruptcy: Repaying Debts

V.  The Benefits of Bankruptcy

VI.  Frequently Asked Questions

VII. Rebuilding Your Credit

VIII. Your Personal Action  Plan

When You Should Consider Bankruptcy

You are having difficulty sleeping, stressed out beyond belief because you cannot make ends meet. You are arguing with your significant other for minor transgressions. You feel trapped and may even be afraid to answer your phone or open your mail.

You’re Not Alone

You think if you were a little smarter – or if you could just work a bit harder – these problems would go away. Well, I am here to tell you it’s not you – it’s the economy.

You may have good friends, co-workers and neighbors who have filed bankruptcy. Ask them how they are doing now and you will find that they are sleeping well at night and are in much better health since they are no longer stressing under a mountain of debt.

People often feel a sense of guilt or shame when contemplating bankruptcy. It is not an easy decision to make. Once upon a time bankruptcy was a dirty word. This is no longer the case, when the financial climate or unanticipated circumstances catch a person off guard, almost anyone can be susceptible to bankruptcy. More importantly, even after filing for bankruptcy, it is possible to be highly successful after obtaining your fresh start. Many famous people such as Abraham Lincoln, P.T Barnum, David Crosby, Willie Nelson, Francis Ford Coppola, Walt Disney, and Donald Trump, to name a few, have filed for bankruptcy.

Perhaps your financial crisis is due to divorce, job lay-offs, sickness, medical bills or income that doesn’t keep up with the high cost of living in California. You’re overwhelmed with unmanageable debt. You’re dealing with nasty bill collectors, wage garnishments, lawsuits, repossessions, foreclosures and evictions. You think there is no way out.   Well the bankruptcy laws were put in place exactly to help someone like you.

DIFFERENT TYPES OF BANKRUPTCY

There are several different types of bankruptcy filings and each is known by the title of the chapter of the Federal Bankruptcy Act in which they appear. Each chapter contains a different set of laws and rules. The two most common types of personal bankruptcy are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy is one of the most common types of bankruptcy used by individuals, but may also be used by businesses. This type of bankruptcy is the most severe. Under Chapter 7, a court-appointed trustee collects the individual’s assets. The trustee sells the assets for cash and pays the proceeds to the individual’s creditors. Many assets that are exempt under federal or state law and do not have to be liquidated. Yes, you get to keep exempt properties. Once the Chapter 7 process is final, the filing cannot be repeated for eight (8) years. All qualified debt is immediately and forever eliminated.
Chapter 13 Bankruptcy is designed for an individual debtor with a steady source of income. It can also be used by small businesses. Under the Chapter 13 plan, also called “individual reorganization,” the debtor must settle his debts over a three to five year period. Under Chapter 13, the debtor is allowed to keep his property. At a confirmation hearing, the court either approves or disapproves the plan. There are no time restrictions on how often a Chapter 13 can be filed, however there are debt limit qualifications.
Other Types of Bankruptcy
Chapter 11 Bankruptcy is targeted to larger businesses, but individuals with high value assets may also use this reorganization plan. Chapter 11 is similar to Chapter 13, but with more requirements. However, if all a debtor needs is a plan to pay off debts, then a Chapter 13 or Chapter 11 is preferable, rather than a Chapter 7, particularly when trying to reestablish their creditworthiness.
Chapter 12 Bankruptcy is a voluntary bankruptcy designed for farmers and fisherman with steady income. However, there are exceptions for farmers and fisherman with seasonal income. This type of bankruptcy allows the debtor to establish a plan to pay off all or part of his debts over an established period of time. Chapter 12 is less daunting and less expensive than Chapter 11.

CHAPTER 7 BANKRUPTCY

Chapter 7 is one type of bankruptcy that is available for individuals.  It is also called “straight bankruptcy” or “liquidation.”  The bankruptcy court appoints a trustee who administers the bankruptcy.  The individual filing for bankruptcy usually retains all typical household goods and clothing.  He may also retain his home and vehicles as long as he does not have more equity in those items than he can exempt.  If the bankruptcy trustee allows an individual in bankruptcy to keep a car secured by a car lien or a house encumbered by a mortgage, the individual filing for bankruptcy must pay all car and mortgage payments as they fall due and pay the insurance on those items.  A Chapter 7 bankruptcy procedure usually lasts about four to six months.  At the end of the bankruptcy, most debts are extinguished through a discharge of debts.

Here’s a summary of the steps you’ll go through in a normal Chapter 7 bankruptcy case.

  1. 1.     Talk with an attorney

Learn from a licensed professional about how a Chapter 7 filing would work in your particular financial circumstances. You should get your questions answered in plain English and the alternatives to bankruptcy should be explained to you.

2.     Pre-Filing Counseling Class

Before your case is filed, you’ll need to complete a credit counseling session. This is a simple process that you can do on the internet. Once completed you are issued a certificate that must be filed with the court along with your bankruptcy paperwork.

3.     Filing Your Case

Once your documents are prepared you should be given a chance to review, make corrections and sign the papers prior to them being filed with the court. These 50 to 70 pages of documents consist mainly of a list of your monthly income and expenses, a list of your property and possessions along with values, and names and addresses of your creditor4.     Creditors Stopped – Dead in Their Tracks

The moment your bankruptcy case is filed, the court issues what is called “the automatic stay.” This is a mandatory order from a federal court which forbids creditor harassment, wage garnishment actions, car repossessions, lawsuits, and IRS tax liens. This powerful order means that your creditors are prohibited from even calling you or writing to you.

5.     The Meeting of Creditors

Several days after your case is filed, you’ll receive a notice from the court which also contains a date and time for the required Meeting of Creditors, also called the 341 hearing. This meeting occurs about 35 days after your case is filed. You’ll need to bring your state issued identifications and social security card. It’s mandatory that you attend this meeting.

The purpose of this Meeting of Creditors is to give your creditors a chance to ask questions. Don’t worry! Your attorney will be with you.  You will be thoroughly prepared for this important meeting with the Trustee and creditors who may appear.

At the meeting, the Bankruptcy Trustee asks you to verify that all the information in the court papers is correct. The Trustee may also ask you questions about particular items on your petition such as income or assets. It normally takes about five minutes.

1.     Financial Management Class

After filing your case, you’ll need to complete a financial management course in order to be eligible for a discharge. The purpose of this financial management class is to teach you how to handle your income more wisely in the future.  This certificate must also be filed with the court. As with the pre-filing class, you may take it online.

 2.     How Long Your Case Takes To Complete

In a Chapter 7 nothing else normally happens until 60 days later, when the court declares the case final and discharges your debts. This “Discharge of Debtor” is the court order which officially relieves you of any obligation to pay  the bills included in your filing.