The Critical Steps When Considering Filing Bankruptcy
The decision to explore how to declare bankruptcy is not an easy one, but arrives when an individual borrower takes stock of their outstanding debts and concludes that payment isn’t a realistic option.
However, before filing, borrowers must look at exactly what kind of debt they have accumulated.
Step 1: Analyze Debts And Determine Eligibility
Certain debts, such as back taxes, child support payments, and student loans aren’t dischargeable under a Chapter 7 Bankruptcy.
There’s also a large difference between secured and unsecured debts. Secured debt is any debt in which an asset was used as collateral to guarantee a loan. While unsecured debts are discharged outright under a Chapter 7 Bankruptcy, secured debts will require the liquidation of most assets.
To qualify for bankruptcy, a prospective filer must pass a means test. During a means test, a borrower’s economic situation is analyzed to determine if their income is low enough to qualify. The means test is designed to stop high-income earners from declaring a Chapter 7 Bankruptcy and instead pushes them towards a Chapter 13 filing.
It’s important to note that even those with a high monthly income can still pass a means test if their monthly expenses are high enough.
Step 2: Determine Asset Protection
As mentioned above, secured loans will require the borrower to sell most assets to pay their creditors. This being said, certain items, such as primary residence, primary vehicle, and trade tools are exempt from liquidation. Each state has its own laws regarding which items are exempt and which ones are not.
Another major consideration, which will be covered in more detail below, is whether the individual wants to reaffirm, redeem, or surrender their secured debts.
Step 3: Redeeming, Reaffirming, and Surrendering
Assets that have been used as collateral to guarantee a loan can either be redeemed, reaffirmed, or surrendered. Those who wish to continue paying a creditor, so as not to lose the asset pledged as collateral, are choosing to reaffirm the loan. This usually requires the borrower to sign a reaffirmation agreement, which is subject to court approval.
The borrower also has the option to redeem, which means they’re required to pay the creditor outright for the asset at the current market value.
|For example, if the debtor was granted a car loan at $15,000 but the current market value of that vehicle is only $11,500, they’d have to pay the current market value to save the asset from liquidation.|
When a borrower no longer wants to be responsible for future monthly payments they can choose to surrender an asset. The asset is then liquidated and any proceeds from said liquidation go towards paying the creditor. Any outstanding balance on the loan is now considered an unsecured debt and will be discharged at the end of the bankruptcy proceedings.
Step 4: Fill Out And File Appropriate Forms
Once a borrower has taken stock of their debts and confirmed their eligibility they must now fill out the appropriate paperwork. This paperwork, which comprises roughly 12 pages, will include a detailed overview of the person's economic situation, current assets, and a broad view of their debts and creditors. It’ll also ask them to list any exempt property, what course of action one will take with their secured debts (reaffirm, redeem, or surrender), and any debts that cannot be discharged under a Chapter 7 filing.
Most people file all forms at once and the act of filing stops all collection activities right away. There are cases in which an emergency filing can be done, in which initial forms are submitted and the court grants the individual 14 days to submit the remaining items.
Step 5: Complete Credit Counseling Course
All states require individuals to complete a credit counseling course in order to undergo bankruptcy proceedings. This course aims at teaching individuals responsible economic habits to ensure they don’t find themselves in the same position at some point in the future. The cost of the course ranges from $20-$100 depending on the administering state.
Step 6: Meet With Trustee
The court will assign a trustee to oversee each bankruptcy case. The individual filing for bankruptcy must submit detailed paperwork confirming the details outlined in their initial filing and will also be required to attend a meeting with the trustee. The meeting will go over the basics of the case and is usually short.
Following the meeting, the borrower has the option to submit an objection should they disagree with any claims made against them by the creditors. Doing so will require the individual to provide their case trustee with any further paperwork should they request it.
Step 7: Complete Second Credit Counseling Course
The second course, called a debtor education course, needs to be completed within a specific time period following the Creditors Meeting. Failure to do so will result in the case being closed and no discharge of debt. Rectifying this error can be time-consuming and costly.
Step 8: Obtain Discharge
If all previous steps have been completed, the court will issue an order declaring all debts discharged (eliminated). Once this order has been declared, creditors can no longer attempt to collect on any debts included within the proceedings. There may be debts, such as those the borrower chose to redeem or reaffirm, that will require continued payment.
Do You Qualify For Bankruptcy?
As previously mentioned, anyone who has to file for bankruptcy needs to pass a means test. While this test differs slightly from state to state, there’s a general list of criteria one needs to satisfy in order to be considered eligible.
- Total debt equates to more than half of the individual’s yearly income
- Even if extreme measures were undertaken, it would take the individual 5 years or more to pay off all outstanding debts
- Quality of life is severely impacted due to debt
- Debt-to-income ratio is so high there is little to no disposable income
- Monthly income below the median for the state (high earners can also qualify for chapter 7 Bankruptcy if their monthly expenses are high as well)
>>Read More: How much Does it Cost?
How To File Bankruptcy Without A Lawyer
Filing for bankruptcy without professional legal help is called filing ‘Pro Se’. Bankruptcy has long term effects on one’s financial future and it’s highly recommended that it be done with the guidance of a legal professional. Should one decide to file Pro Se, all paperwork is available free of charge through the uscourts.gov website.
Many people taking this route may also enlist the services of a Non-Attorney Petition Preparer. These are people who aid in the filling out and filing of paperwork but are legally not allowed to give advice or explanations. The success rate of cases filed Pro Se are significantly lower than those done with the help of a lawyer. The reasons for enlisting a legal professional include:
- Advising which debts can be discharged
- Advising which type of chapter to file under
- Assisting with the correct completion of forms
- Advising which property can be kept
- Determining which secured debts to surrender, redeem, or reaffirm
- Determining if bankruptcy truly is the best option
Our Tip For Other Options
Bankruptcy is a big deal and shouldn’t be undertaken unless there are no other options. It also has long-lasting effects on one’s credit report. One of the most commonly asked questions is “how long does bankruptcy stay on your credit report?”.
Depending upon which Chapter one files under, a bankruptcy entry will stay on one’s credit report for 7 - 10 years. Due to this, all other options should be explored and exhausted before filing for bankruptcy. The following options should always be tried first:
- Debt Settlement: For those who’ve got significant debt there is always the chance that creditors will come to a settlement agreement with the borrower. This usually involves eliciting the services of a debt management specialist as they know best how to approach this.
- Consolidation Loan: One of the most common strategies undergone by those looking to better manage their debt is to consolidate it. In this scenario, a consolidation loan is taken out that is used to pay off all outstanding debts. The consolidation loan is then paid off in monthly payments.
- Asset Liquidation: Selling off assets such as vehicles, second properties, or anything else of value can allow people to better manage their debt without filing for bankruptcy.
The Bottom Line
Bankruptcy is a last resort option for those who can no longer manage their debt effectively. While the process does offer complete elimination of most debts depending on the filing type, it can be a complicated process and is always best undergone with the help of a qualified legal professional.