Job loss, foreclosure, divorce, injury, or illness… just about everyone goes through one of these hurdles at some point in life. If you’ve gone through a similar problem, or you’re dealing with it right now, you probably know from personal experience how fast debt can pile up, leaving you and your family in a precarious position.
Bankruptcy could provide you with relief from overwhelming debt. It can give you a chance for a fresh start, while still compensating your creditors for their investment. On the other hand, going through bankruptcy will affect your life for several years after you file, and the process isn’t an easy one.
If you are considering filing for bankruptcy, you should learn everything you can about the process before you submit your forms. This article will help you understand the process of filing for bankruptcy and what it can and cannot do so that you can make an informed decision about what’s best for you and your family.
4 Steps to Filing Bankruptcy
You will go through four steps when you file for bankruptcy, and as you probably guessed, the majority of it will be filling out forms.
- The first thing you will need to do as gather your financial records and information. You will need to be as detailed as possible. This step can take quite some time to complete. Here’s what you’ll need to report on your forms when you file:
- Your debts, including the name of the creditor, how much you currently owe, your payment, and interest rate. Be sure to include all obligations, not just the ones you are behind on.
- All of your income from the last six months, plus any income you expect to receive in the future. This should include your wages from your job, side income, interest from any investments, pensions, and any money that is contributed to your household by others, such as your spouse.
- You will also be asked to list all of your property and assets. This includes everything you own that has any value, including art, collectibles, vehicles, real estate, savings accounts, stocks, and more. Be sure to list items like home furnishings, clothes, and other personal possessions, especially if they are valuable.
- All monthly living expenses such as rent/mortgage, groceries, utilities, alimony, child support, transportation, taxes, clothing, and medical expenses will also need to be listed.
Be sure to keep documentation on hand to support your claims, just in case you are asked for it by your trustee.
2. The next step is to attend credit counseling within the six months before you file. The session usually lasts for about one to two hours and can be conducted online or by phone. It will probably cost about $100. Be sure to have your financial inventory collected before you attend the session. The counselor will help you determine which type of bankruptcy to file for and help you create a payment plan to present to the court.
Make sure you are 100% comfortable with your payment plan before you file because you will have to start making payments within 30 days of filing, whether or not your petition has been accepted. You will be required to so proof that you have attended counseling at the time of filing.
3. Once your petition is filed and accepted, your creditors will be notified that their debt is included in your petition and they will be required to comply with an automatic stay on your account (see details below). Your trustee will arrange for a meeting with your creditors. At this meeting, your trustee will make sure you are fully informed of the consequences of filing and confirm that you wish to continue with the procedure. The trustee will also be looking for signs that you are abusing the system for personal gain.
4. You will also be required to attend additional credit counseling after your creditor’s meeting. This must happen within 45 days for Chapter 7 and before you make your last payment in Chapter 13. Your debts will not be discharged if you do not attend this counseling as directed.
There are basically two types of bankruptcy you can file for:
- Chapter 7 Bankruptcy: During a Chapter7 bankruptcy, you are assigned a trustee who will liquidate some of your property and use the proceeds to pay back all, or a portion, of your debts. Your qualifying debt will be wiped out, and you will be able to keep certain property that is protected under bankruptcy law.
- Chapter 13 Bankruptcy: When you file for Chapter 13 bankruptcy, your debts are reorganized, and you get to keep your property. However, you will be required to pay back your creditors over the next three to five years.
Bankruptcy Filing Fees in Hawaii
|Type of Bankruptcy||Filing Fees|
|Chapter 11 & 15||$1717|
What is an Automatic Stay?
When you file your bankruptcy case with the court, an automatic stay is immediately put into effect. An automatic stay is a court order that stops any foreclosure, eviction, repossession, collections, lawsuits, and wage garnishment by your creditors. The stay will be put into effect during the bankruptcy process, and it could help you stay in your home longer in the case of eviction or foreclosure.
Chapter 7 Bankruptcy Explained in Detail
As we explained above, when you file for Chapter 7, certain debts like personal loans, medical bills, and credit card balances are wiped out. You won’t have to repay those debts, but you will be assigned a bankruptcy trustee who will oversee your case. He or she will be allowed to sell your nonexempt property.
The trustee will use the proceeds from those sales to pay back your creditors based on a priority ranking system. Some assets like clothing, household furnishings, and a minimal amount of vehicle equity are considered exempt, and you will be able to keep those items. In many cases, you will also be able to exempt a portion of the equity in your home, the cash value of your insurance policies, your retirement benefits, public benefits (like unemployment insurance or welfare), and the tools you use to do your job.
However, not all debt can be discharged by a Chapter 7 bankruptcy. Certain types of debt are non-dischargeable and will remain with you even after your case is finalized. This includes child support, spousal support, income taxes, student loan debt, and wrongful death or injury awards that resulted from operating a vehicle under the influence.
The opportunity to file for Chapter 7 is available to both businesses and individuals. The average Chapter 7 case usually lasts somewhere from four to six months.
Other Key Things to Know About a Chapter 7 Bankruptcy:
- You have to meet specific eligibility requirements to file for Chapter 7. Your income, expenses, and level of debt must fall within a certain range, and you must be able to prove that you don’t have the means to pay back your debt over the next three to five years.
- If you owe a car loan, mortgage, or some other type of secured debt, you will be given the option of returning possession of the property to your creditor, or, if your payments are current, you may be allowed to continue making your payments and retain your property.
How a Chapter 13 Bankruptcy is Different
When you file for a Chapter 13 bankruptcy, you must show that you have enough reliable income to repay at least part of your debt. You will be required to offer the court a repayment plan that shows how you can pay back some of your debt over a period of three to five years.
The amount you’ll need to pay back will depend on how much money you make, what you owe, and how much your nonexempt property is worth. The law states that you can have no more than $419,275 in unsecured debt and $1,257,850 in secured debt to file for Chapter 13.
What is a Means Test?
The means test is used to determine your eligibility to file. It compares your earnings to your debt payments. This test establishes whether debts will be discharged under a Chapter 7 bankruptcy or if you will be required to repay them during a Chapter 13.
Should You File Chapter 7 or Chapter 13?
If it turns out that you meet the eligibility requirements for both Chapter 7 and Chapter 13, you may have the option of choosing which one will work best for your particular situation. Most people think Chapter 7 is the best choice because you won’t have to pay back a portion of your debt. However, in some cases, Chapter 13 is the better option. For example, if you are behind on your mortgage payments, you could still keep your house by including your missed payments in your payment plan. This will allow you to pay your past due payments over time and prevent you from losing your home. However, you will also need to make sure you stay current on your payments in the meantime.
Which Debts Cannot Be Discharged?
As we mentioned above, certain debts are wiped out when you file for a Chapter 7 bankruptcy. This is called a discharge. In the case of a discharge, the slate is wiped clean, and you won’t be required to repay those debts, but there are some exceptions. Non-dischargeable debts include:
- Student loans
- Child support
- Most taxes
- Personal injury debts that occurred as a result of driving under the influence
- Debts that occurred because of fraud
- Court-ordered fines or restitution
If you attempt to conceal or destroy property your discharge could be denied altogether. You are only eligible for a Chapter 7 discharge once every six years.
While there are many advantages to filing for bankruptcy, there are also repercussions that could follow you for years. The process can seem overwhelming, but your attorney will help you every step of the way. Be sure to take full advantage of credit counseling sessions so that you can make the most of your fresh start.