So just how difficult is it for a person to file Bankruptcy? While the process is by no means "quick and simple", there is most definitely a clear set of steps that must be followed to make it through the process, and these steps can be handled by most people with a bit of perserverance.
The Bankruptcy process isn't "quick and simple" by design -- the filer is asking the Court to wipe clean the debts he or she said would be paid, credit that in most cases was extended in good faith. The elimination of these debts by the Court can cause significant financial damage to the person(s) or entities owed money. As such, the Court should make the process a challenge to the debtor.
Below is a general outline of the steps and procedures required in most bankruptcy cases. In many situations, additional administrative steps may be required.
1. Determine which chapter of the bankruptcy code the debtor can use
The first step in the Bankruptcy process is to determine which type of filing should be made: Chapter 13 or Chapter 7.
The provisions of chapter 13 have advantages to some persons who are considering bankruptcy. For example, the debtor has more equity in a home than can be protected with the exemption for real estate in a chapter 7 case -- the use of the chapter 13 case could allow the debtor to keep the home. Certain debts which are not dischargeable in chapter 7, such as those based on fraud, may be discharged if the debtor successfully completes a chapter 13 plan. Those who do not qualify for filing chapter 7 as a result of income in excess of that permitted by the "means test" will be required to file a Chapter 13 case.
Chapter 7 is often appropriate for those whose houses and cars payments are current, in which there is little or no equity in these assets, and there is no money left from the debtor's monthly paycheck to pay the debtor's bills (such as credit cards and signature loans). Chapter 7 allows the debtor a fresh start -- often while keeping most or all of their property.
2. Follow the steps most appropriate for your situation after determining the proper Chapter filing
A. Mandatory Credit Counseling
For cases filed after October 17, 2005, the debtor must obtain a certificate from an approved credit counseling agency before the debtor can file the debtor's case. This counseling can often be done over the internet and will likely cost approximately $35-65. A copy of any payment plan devised by the counseling service (if any) must also be filed with the court.
B. File Petition, Schedules, & Statement of Financial Affairs with the Court
The debtor must gather up all of bills and documents showing what the debtor owes. Then, the debtor should value of all of his or her assets (car titles, titles or deeds to homes, bank statements, etc.). Then, the debtor should prepare and file the required forms with the bankruptcy court. Immediately upon filing the debtor's case, an injunction goes into effect stopping the debtor's creditors from taking any further action to collect or recover on any debt the debtor may. This injunction is called the "automatic stay".
Prior to filing, the debtor should review the bankruptcy website for the court in which the debtor will file his or her case. Review the local rules and procedures, etc. The court's website contains important information that will assist in filing the debtor's case and will make the debtor's case proceed smoothly through the court system.
The key in any bankruptcy case is listing all of the debtor's assets and all of his or her liabilities. The debtor should be clear and concise when completing the documents. Also, the debtor should ensure that all creditors are listed on the documents filed with the court and that correct account numbers and addresses are listed for each creditor. Failure to comply with the filing requirements or missing deadlines may result in the debtor's case being dismissed and loss of bankruptcy protection.
C. Mandatory meeting with the Trustee
This meeting occurs 30 -- 40 days after the debtor's case is filed. It is often referred to as the section "341(a) Meeting." It is a relatively simple meeting and usually lasts less than 10 minutes or less. The Trustee is an independent person appointed automatically in all chapter 7 cases by the United States Trustee's Office. The Trustee's role is to sell and turn into cash any non-exempt assets the debtors have. The Trustee then pays those funds to the debtor's creditors according to their statutory priority in the bankruptcy code. The Trustee can also object to the granting of discharge in the debtor's case if he/she believes the debtor's case was not filed in good faith (such as the debtor have too much excess income to file a chapter 7) or if the debtor have committed fraud in connection with the debtor's petition and schedules.
D. Time for Objections by Creditors and Trustee
The debtor's creditors have 60 days after the date first set for the debtor's meeting with the Trustee to file a complaint objecting to the discharge of their debt, or to the debtor's entire discharge. Grounds for doing this include fraud (such as incurring charges on a credit card that the debtor did not intend or have the reasonable ability to repay at the time they were made), false statements on a credit application, fraud while acting in a fiduciary capacity, willful or malicious injury to a person or property of a person, and certain others, etc.. The Trustee has until 30 days after the date first set for the debtor's meeting with him/her to file an objection to any exemptions the debtor have claimed. Again, this is rare, but it can happen depending on the specific exemptions in the debtor's case. It is important to correctly list the debtor's exemptions.
E. Financial Management Course
The debtor is required to complete a financial management course before receiving the debtor's discharge. In chapter 7 cases, the debtor must complete this course (which usually lasts about 2 hours) and file a certificate of completion to the court no later than 45 days after the date of the debtor's meeting with the Trustee. Again, this course is usually available via the internet or by telephone. If the debtor fails to take this course, the debtor will NOT get a discharge from the court.
If no creditor (or the Trustee) objects to the debtor's discharge within the time periods referenced above, and the debtor has completed all of the other requirements imposed upon him or her, the bankruptcy court will issue a Notice of Discharge. This notice makes it "official" that all of the debtors debts are discharged or erased (except those that are not dischargeable -- like child support, alimony, certain taxes, student loans, and some others). The discharge applies to all dischargeable debts that were listed on the debtor's bankruptcy petition and schedules.
G. Chapter 13 Cases -- Additional Requirements
Filing the "Plan" - In chapter 13 cases, along with taking the other steps listed above and filing all the required documents described above, the debtor must file a "Plan" of repayment with the debtor's creditors. This plan contains several required provisions, but the primary requiremetns are as follows: 1) The debtor are paying ALL of the debtor's projected disposable income into the plan for a minimum of 36 months, and a maximum of 60 months. Disposable income is defined as the debtor's "current monthly income" (which is an average of all income received in the 6 months prior to filing the debtor's case, excluding social security income and child support payments reasonably necessary for the support of the child) minus the debtor's reasonable and necessary living expenses based on standards set forth by the Internal Revenue Service for the debtor's district; 2) The debtor's creditors will receive no less than they would receive if the debtor did a chapter 7 liquidation. In other words, if the debtor have assets which are not fully exempt, then the debtor need to pay out at least that amount over the term of the debtor's Plan; 3). Certain creditors must be paid 100% through the debtor's Plan, so the debtor must have sufficient disposable income to be able to do this in the required time frame. Examples of creditors needing to be paid 100% are: Mortgage arrearages, taxes less than 3 years old, past due child support or alimony and others. Assuming the debtor meets these requirements, the debtor's Plan can provide for payments anywhere from zero to one-hundred percent to the debtor's unsecured creditors.
Plan Confirmation Hearing - After the debtor's meeting with the Trustee, the court will hold a hearing on confirmation of the debtor's Plan. In some jurisdictions this occurs on the same day as the debtor's meeting with the Trustee. In most courts, however, it will occur a month or more after the debtor's Trustee's meeting. Once confirmed, the debtor is obligated to make the payments set forth in the plan.
The Debtor's Plan Payments -- Generally, the debtor's monthly proposed plan payments are first due 30 days after the debtor's case is filed and then continue for the duration of the debtor's plan. These payments normally are made by deducting money from wages (i.e. the debtor's employer withholds payment from the debtor's paychecks and pays it to the bankruptcy trustee). If the debtor misses any payments required prior to the debtor's Plan being confirmed by the court, the debtor's case will be dismissed and the debtor will lose the protection of the bankruptcy stay. Additionally, the debtor must maintain all normal monthly payments to any secured creditors the debtor have (such as mortgages, car payments, etc.) if the debtor intends to keep the collateral on which those debts are secured, and on taxes or other debts which come due after filing. A failure to maintain or stay current on such payments during the chapter 13 case can result in the loss of the asset and dismissal of the debtor's case.
Once the chapter 13 debtor has completed all the required payments due under the debtor's plan, the Trustee will start to process the debtor's discharge. This usually takes several months to complete after receipt of the debtor's final payment. This discharge will terminate or clear the debtor's debts listed on the documents filed with the court.
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