Bankruptcy is a very powerful weapon that is available to everybody who has more debt than they can possibly afford. Of course, it is an option people usually choose after considering every other option to get out of debt. Sometimes it may seem there is an option that is more honorable and fair than bankruptcy, such as cashing in a retirement plan to pay debt, but in the long run places an unfair burden on the honest, unfortunate debtor. Many times alternatives do not provide the total fresh start that bankruptcy offers and people end up giving away important property, jeopardizing their futures and filing bankruptcy anyway. If you think bankruptcy is an option, it is a good idea to talk to an experienced bankruptcy attorney before making any decisions.
Bankruptcy stops all debt collection as soon as the case is filed. Because collections are frozen when the process starts, a debtor can immediately start reorganizing and improving cash flow as the case progresses. Garnishments, foreclosures and repossessions stop as do collections that are not emergencies but very worrying, such as nasty phone calls. Many times just knowing your bankruptcy rights make it easier to sleep at night.
At the end of a bankruptcy you receive a discharge. The discharge basically cancels debt forever and gives you a financial fresh start. Some debt can not be discharged, such as some taxes, student loans, back child support and fines.
There are two kinds of bankruptcy for consumers. One is a Chapter 7. If creditors receive any money in a Chapter 7, it is through the “liquidation of the bankruptcy estate”. This liquidation involves selling property and can also involve taking back recent payments or gifts to creditors, family members or business partners. Most property is exempt from being taken and it is very rare that transfers to relatives of other people can be “undone” in a Chapter 7, but it is a good idea to talk to a bankruptcy attorney well before the case is actually filed. Bankruptcy can be a powerful weapon in an emergency but such a huge decision is best taken with some planning.
Because Chapter 7 is relatively quick and easy and creditors rarely receive any payment of debts, you have to show that you are not abusing the bankruptcy system by filing it. This requires completing a means test. The means test is designed to measure whether you have enough income to make monthly payments on at least some of your debt, which would involve a Chapter 13 bankruptcy. If your last six months income is higher than the average income for a household of your size, you have to show your expenses are too high to pay your debt. Some expenses, such as day care, taxes or health insurance, are measured by what you actually pay. Some expenses are set by law, such as food, clothes, transportation and rent.
Most people who file a Chapter 7 only have to attend one court hearing called a meeting of creditors. This hearing is held one month after filing the case. Creditors rarely attend. Your attorney will be with you and you will have to testify that the documents you filed in your case are true, accurate and complete. A trustee will be appointed to liquidate any assets, if necessary. You testify under oath at the meeting of creditors, answering any questions the trustee might have about your bankruptcy documents and your situation. You will provide the trustee with tax returns, bank statements and pay stubs. In most Chapter 7 cases it is clear you are entitled to a fresh start and there are no assets to take to pay your creditors and the case is discharged and closed within three or four months. In a Chapter 7, if you are making payments on a house or a car, you can keep this property if you just keep making the payments. Sometimes this requires signing a reaffirmation agreement, which takes the debt outside the discharge and leaves the debtor on the hook for the loan in the event of a discharge. The decision to sign a reaffirmation agreement should be taken carefully. After the discharge, some non-discharged debt, such as student loans or back taxes may remain.
Chapter 13s are like Chapter 7s. The filing of the case stops all debt collection immediately. Debtors attend one meeting of creditors with a trustee. The trustee does not just look for assets to liquidate but examines a three to five year debt payment plan. The plan is eventually confirmed by a bankruptcy judge. Some people must file a Chapter 13 because their income is too high for a Chapter 7 but some people file Chapter 13s for other reasons, such as getting caught up on mortgages, consolidating car loans with other debt, taking care of debt that cannot be discharged or protecting property that might be taken in a Chapter 7. In general, a Chapter 13 offers for tools for a debtor looking for a fresh start but the debtor must wait three to five years while making monthly payments to obtain this fresh start. For this reason, most people choose Chapter 7 if possible.