Deep in debt but afraid of bankruptcy? Let’s walk through the bankruptcy process from start to finish so you know what to expect.
Chapter 7 bankruptcy is designed to help you get a fresh start. In Chapter 7, you’ll surrender your non-exempt assets as payment to your creditors. Whatever unsecured debt is leftover will be “discharged,” or forgiven. California offers two different systems of exemptions to help you protect important assets and most debtors don’t have to surrender any assets at all.
Step 1: Deciding to File
Bankruptcy is a major decision and not one to be taken lightly. The first step in deciding if bankruptcy is right for you is to gather all of your financial information in one place. You need a full list of both your debts and your assets. Divide your debts into two piles: secured and unsecured. Secured debts include mortgage and auto loans – debts that are linked to a specific piece of property. All your other debts, such as medical and credit card debt, are unsecured.
When you file a bankruptcy, your unsecured debts are the ones that get discharged. If you’re struggling specifically with mortgage or auto debt, a bankruptcy won’t wipe those out, unless you are willing to surrender the asset. However, it can remove the pressure of your unsecured debts, making payment on your secured debts more manageable.
When considering whether bankruptcy is right for you, think about your budget. Can you adjust it in order to pay off your debts? Are you facing repossession or foreclosure? Have you been sued for collection? If you don’t think you can pay off your debts, bankruptcy may be the right choice. Bankruptcy will also put a stop to repossession, foreclosure, collection lawsuits, wage garnishment, and other collection actions.
Step 2: Credit Counseling
In order to file a bankruptcy, you must complete a mandatory credit counseling session within the 180 days before you file. You’ll sit down with a credit counselor and go over your finances to see if you can manage your debts without bankruptcy relief. You’ll need to show proof that you completed this requirement in order to file your bankruptcy. Without the credit counseling, your case may be dismissed.
This is a good way to check your own evaluation of your finances. The credit counselor may be able to help you consolidate some debts or reorganize your finances in such a way that you don’t need to file a bankruptcy. You may also find that bankruptcy really is the best choice for you. If that’s the case, then it’s time to meet with an attorney.
Step 3: Meeting With Your Attorney
It’s possible to file a bankruptcy without the help of an attorney, or “pro se,” but it rarely ends well. Bankruptcy is a complicated process and it’s difficult to navigate without an attorney’s expertise.
Take your financial information to an experienced local bankruptcy attorney and discuss your situation. Your attorney can help you decide if bankruptcy is the right choice for you or if a different debt management strategy would be better for you. Finally, your attorney will determine if you qualify to file under Chapter 7. If not, you’ll need to file under Chapter 13.
Step 4: Filing Your Bankruptcy
If you and your attorney decide that Chapter 7 bankruptcy is the best way for you to manage your debt, your attorney will prepare the necessary paperwork and file it with the court. The bankruptcy filing will include information about each of your debts and creditors. It will also include a list of your assets, your income and expenses, and certain financial transactions over the past several years.
When you have officially filed a bankruptcy, you get the protection of the automatic stay. The automatic stay makes it illegal for creditors to attempt to collect from you during the bankruptcy process. It’s designed to ensure that all of your financial affairs are dealt with through the bankruptcy court without creditors pressuring you from outside the system. When you file, the creditors listed on your bankruptcy forms will be notified. They need to know both so they can be involved in the process and so they don’t violate the automatic stay.
Step 5: The Trustee Reviews Your Case
When you file a bankruptcy, it goes to the local Bankruptcy Trustee. The Trustee is in charge of managing the entire bankruptcy process. He or she mediates between you and your creditors to ensure that both sides act honestly.
The Trustee will evaluate your assets to determine if any are non-exempt. California offers two different exemption systems to protect your assets. Each system applies to your equity in the assets. The “equity” is the amount you own outright – it’s the value of the asset minus any debt attached to it. For example, if your house is worth $300,000 and you still owe $250,000 on the mortgage loan, your equity is $50,000. The bankruptcy exemptions cover that equity. For more information on protecting your property with bankruptcy exemptions, click here.
The Trustee will also examine any major financial transactions you’ve made in the past couple of years to see if any can be undone for the benefit of your creditors. For example, if you transfer an important asset to a family member before filing, the court may find that it was fraudulently intended to protect that property from the bankruptcy process and undo the transaction. In most cases, the Trustee finds that all a debtor’s property is exempt and that there were no fraudulent transactions.
Remember that non-exempt property will be sold and a fraudulent transaction may result in dismissal of your case, so you should be completely honest with your attorney about the state of your finances. Otherwise, you may lose important assets or, worse, have your case dismissed altogether.
Step 6: Meeting of Creditors
Once the Trustee has reviewed your case, she’ll schedule a “meeting of creditors.” This meeting, also called a “341 hearing,” is probably the only time you’ll actually have to go to the courthouse during the bankruptcy process. It will take place between 21 and 40 days after you file. You, your attorney, and the Trustee will be at the meeting; your creditors may attend but many choose not to do so. Creditors typically only attend if they have some objection to your filing.
You’ll need to bring a photo ID and your social security number to the meeting; the Trustee may also request that you bring certain other documents like a mortgage loan agreement, lease, bank statement, or pay stub.
At the meeting, you’ll be sworn in and the Trustee will ask you a series of questions. She’ll ask why you are filing a bankruptcy, whether the information in your filing is accurate, and other basic information. She may also question you about specific aspects of your financial history, including any important financial transactions.
After the Trustee has asked all of her questions, any creditors present will be allowed to ask their questions. Creditors will typically want to know how you plan to handle your secured debts. For example, they’ll want to know if you intend to keep making payments on your car or home.
When everyone has asked their questions, the Trustee may ask you to bring in more documents or amend your filing. If that’s the case, you may have to attend a second hearing with the new documents and amended filing information.
Step 7: Deciding on Your Secured Debts
If you have secured debts, such as a mortgage or auto loan, you’ll need to decide how you want to handle them. If you’re behind on payments, the creditor may ask the court to lift the automatic stay and allow repossession or foreclosure proceedings. If not, you’ll have the option of either giving up the property or reaffirming the debt. If you reaffirm the debt, you agree to continue to make payments as usual. Note that a reaffirmed debt cannot be discharged in a later bankruptcy, so think carefully about whether you’ll be able to keep up the payments.
Step 6: The Bankruptcy Process
After your meeting with the Trustee, you’ll need to surrender any non-exempt property. That property will be sold and the proceeds will be given to your creditors. As mentioned above, most debtors are completely protected by the bankruptcy exemptions and don’t have to give up any property.
Your secured debts will be treated in accordance with the status of your loan and your decision about whether to reaffirm.
Step 7: Discharge
Once your non-exempt property is sold and your secured loans are handled, your remaining unsecured loans are discharged. “Discharge” means they’re forgiven entirely. Creditors can’t try to collect them from you anymore – you officially no longer owe the money.
Your unsecured debts include credit card debt, medical debt, and personal loans. Remember that some types of debt cannot be discharged. These include student loans debt, debt incurred due to driving drunk, child support debt, and spousal support debt. Those debts will survive your bankruptcy and you’ll need to address them after your discharge.
Step 8: A Fresh Start
Now that you’re free of unsecured debt, you can start over with a clean financial slate. Your credit score will be somewhat damaged by a bankruptcy, but it was probably already damaged by missed payments. Now it’s time to slowly rebuild your credit. Get a new credit card (store cards are easy to get if you can’t get approved for a regular card) and make small charges every month. Then, pay the card off in full every month. Your credit will be healthy again in no time.
Considering a bankruptcy?
If you think bankruptcy might be the solution to your debt problems, contact one of our experienced local bankruptcy attorneys today for a free consultation and case evaluation. We’ll help you decide if bankruptcy is right for you and we can explain what to expect in your unique situation.
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