Bankruptcy is a legal proceeding in which a judge and a bankruptcy trustee review the assets and liabilities of consumers, partnerships, and companies whose debts have become too onerous to pay.

The court determines whether to dismiss the debts, which means that individuals who owe are no longer legally obligated to pay them. The court may also dismiss the case if it considers that the individual or company has sufficient assets to pay their liabilities.

Bankruptcy rules were enacted to allow people to restart their lives after their finances had crumbled. Whether the crisis was the result of bad judgments or bad luck, politicians may recognize that a second chance is an important safety net in a capitalist system. The good news for anyone hesitant about this option is that nearly everyone who files for bankruptcy gets that second chance.

Bankruptcy: How It Works, Types & Consequences

Such matters are heard by the Bankruptcy Court, a federal court that is a branch of the United States District Court in your area. A bankruptcy case begins with the filing of a “bankruptcy petition,” which is a specific proposal for relief under bankruptcy regulations.

The Department of Justice oversees the United States Trustee Program, while the United States trustee oversees bankruptcy administration and reports to the court. Here, the goal of the trustee is to maximize the productivity and authenticity of the bankruptcy proceedings.

This trustee regulates the conduct of all parties in bankruptcy cases, controls related administrative activities, and ensures compliance with legislation and procedures.

Chapter 7 Bankruptcy

Chapter 7 is known as a “liquidation bankruptcy” because the law demands that certain possessions be sold in order to satisfy your unsecured creditors in return for a fresh start. A bankruptcy trustee handles the sale (or liquidation).

The trustee can only sell property that is not excluded from the sale (called nonexempt property). If all of your assets are excluded from the sale, the trustee cannot sell them. In that instance, your creditors receive nothing and you retain all of your possessions.

In most personal Chapter 7 bankruptcy proceedings, all property is secured under a legislation exemption. Most personal Chapter 7 bankruptcy proceedings last no more than four to six months when there are no non-exempt assets. The bankruptcy discharge – the court decision that cancels your dischargeable debt – is typically given three to four months from the filing date. As soon as that occurs, you can reestablish your credit.

Chapter 13 Bankruptcy

Individuals file this as the second most popular form of bankruptcy. A reorganization is so named because it entails a repayment plan that often only pays a part of the filer’s total debt. To petition Chapter 13, you must have a particular amount of secured and unsecured debt (including personal loans) to do so.

Chapter 13 Bankruptcy Process

You design a plan based on your regular income and living expenditures and inform the bankruptcy court how much you can afford to pay toward your debts each month. Your suggested repayment plan is reviewed by the court and the bankruptcy trustee. Once the court has granted it, all you have to do is pay your disposable income to the trustee and file your tax form each year. Once completed, your outstanding debts are discharged.

Some people petition for Chapter 13 bankruptcy because their monthly income is too high to qualify for Chapter 7 bankruptcy. Others prefer to file Chapter 13 to obtain a benefit that they would not be able to obtain under Chapter 7.

By filing Chapter 13, you can, for instance, prevent the sale of nonexempt property. It also allows you to pay back certain nondischargeable debts such as past-due alimony, child support, and your car loan at a cheaper interest rate. Furthermore, based on your normal salary, you can pay for it all in affordable monthly installments.

Business Bankruptcy: Chapter 7 vs. Chapter 13

Companies can declare bankruptcy under Chapter 7 or Chapter 13. Companies that file for Chapter 7 bankruptcy are in the process of closing down. All business assets are sold, from real estate to personal items, and unsecured creditors are compensated in the order of preference. Companies are not allowed to seek exemptions; everything is subject to taxation.

Consumers who pass a means test (which evaluates whether their income is too little to enable full repayment) are the only ones who can file for Chapter 7 bankruptcy.

A Chapter 13 bankruptcy, on the other hand, is referred to as a reorganization bankruptcy. Instead of selling your possessions, you can construct a repayment plan that can allow you to pay your creditors a predetermined sum over a specified period, usually three to five years. Your remaining unsecured debts may be discharged once you have paid off the agreed-upon percentage of your debt.

How Do I File for Chapter 7 Bankruptcy?

1. Analyze Your Debt

Some debts are not dischargeable in Chapter 7 bankruptcy, including alimony payments, most student loans, and recent tax bills. In addition, if you pledged security for a debt such as a house or a car, the creditors can seize the property if you are not current when you petition and do not remain current after your trial is over.

2. Determine Your Property Exemptions

Every jurisdiction has exemption regulations that govern what categories of property (or, in some instances, how much equity in a specific sort of property) you can keep if you petition for Chapter 7 bankruptcy. Most people can keep their household furniture, retirement money, a small car, and some home equity. Before actually filing, make sure you can protect anything you wish to save.

3. Make Sure You Are Eligible

Most persons must undergo and exceed the means test before being eligible for a Chapter 7 bankruptcy relief, those who are not eligible include those with mostly company debts and some military members. You are eligible if your average gross income during the six months preceding your filing is greater than the typical income for a household of your size in your jurisdiction. If not, you would reduce allowable expenses from your income to see if you can file for Chapter 7 bankruptcy.

4. Redeem or Reaffirm Secured Debts

If you pledged property as security for a loan, you must continue to make payments to the creditor in time to retain the property. When you declare bankruptcy, you would be asked if you want to “redeem” the property, “reaffirm” the debt by choosing to continue paying according to the agreement with the creditor, or “surrender” the property, which means giving it over to the creditor.

5. Fill out the Bankruptcy Forms

You need to fill out few more pages of paperwork in which you inform the court about your properties, liabilities, income, expenditures, and previous transactions. You must list all of your creditors, property, and income, as well as your property exclusions, and determine what to do about each one of your secured debts.

6. Take a Credit Counseling Course

Individuals who petition for bankruptcy must finish a course either before or soon after declaring bankruptcy.

7. File the Forms

Once you file for bankruptcy, you officially begin your lawsuit. Most people file all of the papers in one go, but if you’re short on time, you can do an urgent filing by completing only a few essential forms. You have 14 days to file the additional forms.

8. Pay the Filing Fee or Request a Fee Waiver

Instantly after you submit your papers, you must pay a filing fee. If you are unable to pay it all at once, you may petition the court to divide it into four installments. If you are unable to pay it, you can seek a fee waiver by completing an application and submitting it with your bankruptcy case. A court may consider it and, in most cases, grant the fee waiver if you appear to meet all of the requirements.

9. Submit Documents to the Bankruptcy Trustee

You are required to provide documents proving the veracity of the facts on your bankruptcy filings. You should expect to send bank statements, pay stubs, profit and loss statements, tax returns, and any other papers requested by the trustee.

10. Go to a Meeting

In most circumstances, you would only need to appear in court once for a brief meeting with the trustee. The trustee assigned to your case should verify your identification and ask you typical questions that all debtors must answer, as well as particular questions concerning the content of your papers.

11. File Objections or Motions If Needed

If you want to challenge a creditor’s lien against you or remove specific liens, you must do so before your bankruptcy action is discharged.

12. Wind up Your Secured Debts

When you file Chapter 7 bankruptcy paperwork, you need to fill out a form detailing how you plan to manage your secured debts. You must take action on these issues before your case can be closed.

13. Complete a Debtor Education Course

After you file for bankruptcy, you must finish the second course, known as a debtor education course before you may be discharged. If you do not present your certificate promptly, the court may conclude your case without granting you a discharge. Resolving this issue can be costly because you would most likely need to file a motion and pay another filing fee to reopen the investigation.

14. Get Your Discharge

The court may issue an order dismissing your eligible debts at the conclusion of a valid bankruptcy. You no longer have a legal obligation to pay your creditors once you have been discharged and your creditors have no standing to recover the debt.

How Much Debt Do You Need to File Chapter 7 Bankruptcy?

This is assessed by seeing if you meet the means test requirements. You would be eligible to file Chapter 7 bankruptcy if your current monthly earnings (or CMI, the average of your last six months’ earnings) is less than the state median limit. If your CMI is higher than the state median income, you cannot qualify. The means test is based on a person having greater discretionary income than they save in their income tax return and the primary spending expense.

How Do I File for Chapter 13 Bankruptcy?

Consult with a credit counselor from a nonprofit credit counseling service as well as a bankruptcy attorney if you are thinking about filing for bankruptcy. Both introductory consultations should be provided at no cost. These discussions can assist you in better understanding your situation and determine whether bankruptcy is the ideal option for getting your finances up and running again.

Once you’ve decided to file for bankruptcy, follow these procedures.

1.Credit Counseling

Complete pre-bankruptcy counseling with a non-profit credit counseling organization. Your counselor may also assist you in developing a repayment plan.

2.Get an Attorney

Utilize the services of an experienced bankruptcy attorney. Chapter 13 is a complicated process, and missing a step or incorrectly filling out paperwork might result in your lawsuit being dismissed or some debts not being covered.

3.Fill out Paperwork

Your attorney can assist you in completing the numerous forms necessary for filing. You need to collect data on your entire financial situation, including debts, revenue, property, and monthly bills.

4.Submit Practicing Petition

Submitting the appropriate forms, also known as “filing” the bankruptcy, initiates the procedure. A trustee in bankruptcy would be selected. When you file, you automatically enter what is known as an “automatic stay,” which indicates that most efforts to collect on your debts must stop.

5.Submit Payment Plan

You must provide a suggested payment plan within 14 days of submitting the petition. Even if the petition has not yet been authorized, you must begin paying repayments on the plan within 30 days of submitting it.

6.Meeting of Creditors

The trustee would hold a meeting between 21 and 50 days after you file the application to allow creditors to raise any complaints they may have with you.

7.Confirmation Hearing

You, the trustee, and any creditors who desire to join must meet in court no later than 45 days after the creditors’ meeting to finalize the repayment schedule.

8.Payment

Creditors are compensated by the plan over a period of three to five years.

9.Debtor Education Course

Before filing for bankruptcy, you should first take a “debtor education course” from a nonprofit credit counseling service.

What Do You Lose If You Declare Bankruptcy?

Your property would be placed in a bankruptcy estate owned by the Chapter 7 bankruptcy trustee assigned to your case after filing. You do not lose everything, because you can remove (exempt) assets generally needed to maintain a house and employment. Any remaining assets would be sold by the trustee, and the earnings would be distributed to your creditors.

The difficult part is that if you make an error, the bankruptcy judge is reluctant to allow you to dismiss the case, and you may lose your home. So you must follow the guidelines attentively.

Pros and Cons of Chapter 13 Bankruptcy

Pros

1. An option is given to you for repaying your creditors over a greater length of time. If you are currently behind on your expenses, you would have more time to grow your income and improve your spending patterns.

2. You may be able to minimize the amount of debt you owe. In some cases, you may not be forced to pay the entire amount of your debt. Creditors are not entitled to the full amount of money due to them once you have completed the conditions of your repayment schedule.

3. It is possible for you to prevent the repercussions of defaults and missing payments from appearing on your credit record. If you are falling behind on your financial responsibilities, filing Chapter 13 bankruptcy can help you establish a plan to repay your debts reasonably.

4. Under Chapter 13, you can keep your property as long as you make payments. This is an excellent service for individuals who have fallen behind on their mortgage or other secured loans.

Cons

1. A Chapter 13 bankruptcy would appear on your credit report for roughly seven years. You can focus on rebuilding your credit during this time.

2. Certain types of debts are not dischargeable in Chapter 13 bankruptcy. Student loans, child support, and spousal support are some of the debts that remain unpaid after the bankruptcy filing.

3. In exchange for debt relief, you should repay your loan to creditors, this may take around three to five years. Filing for Chapter 13 bankruptcy necessitates a lengthy commitment to the process.

How Do You Get a Chapter 13 Debt Discharge?

You must finish the payments indicated in your repayment plan if you qualified for Chapter 13 bankruptcy. Furthermore, before you can be discharged, you must adhere to the following:

• Attest that you have met all of your domestic support obligations.
• Take a financial management course.
• Demonstrate that you have not obtained a Chapter 13 bankruptcy discharge in the last two years.
•  Before issuing a discharge, the court would first determine if there is a current process that could result in a restriction on your homestead exemption.