Listen to the audio here. (MP3)
Detailed Steps to Filing a Bankruptcy
Preparing to file a Bankruptcy is about as much fun as filing out a mortgage application and doing your taxes at the same time. But if you need to file, there is no better use for your time than doing a good job preparing to file. Nothing you can do will benefit you more right now.
It is very important to be accurate and realistic in your preparation. Bankruptcy is a Federal Court procedure that is highly regulated by Congress, the U.S. Department of Justice and the Federal Court. Know any F.B.I. agents? Good, let's keep it that way.
Not only is being truthful and accurate the law, it's also a great idea! Part of this process is to help you figure what happened and ensure you don't have to do this again. (In the Book Bonus section of this website is a Household Income and Expenses spread sheet. It goes into detail about where you money is going and how you can help keep it from going away.)
A Debtor is the person who owes the money and files the bankruptcy. The Creditor is who the money is owed to.
A. Organize your information
The best way to make this a relatively painless process is to do a good job of organizing your information. If you do forget to put some information on the petition, the Clerk of the Bankruptcy Court will charge extra to add it later.
To help you organize, I have a Bankruptcy Worksheet you can download and print. Once you have done that, you should listen to the audio file which goes page by page explaining the information the Court is looking for. Many parts of Bankruptcy may not seem logical so it is important to either listen to the recording or come into the office for a free consultation so I can go over it with you. Please don't try to fill out the worksheet until you have heard the recording or come in to the office.
1. Gather you creditors
A creditor is anyone you owe money to. This also includes anyone who thinks you owe them money, even if they are wrong. They all have to be listed. You have to tell the judge who you owe even if you want to keep paying them like with your house or car. Gather your most recent bills and get a credit report just to make sure. You can get a free credit report at www.annualcreditreport.com For each creditor you will need the name, address, account number, the year account was opened and the approximate balance.
2. Inventory your assets
Anything you own is an asset. One of the basic ideas of bankruptcy is that some assets are protected and some are not. Each state has a different set of exemptions. (Florida Exemptions) In exchange for discharging your debts, you may have to give up some of your non-exempt assets or pay the Trustee money if you want keep everything.
Part of the process is to tell the Court what you have and how much it is worth. Listen to the Worksheet audio for tips on how to value your assets.
3. Calculate your income and expenses
Your household income will in part determine what kind of bankruptcy you file. The Court needs to know your average income and basic living expenses.
B. Determine the Chapter
1 .Chapter 7: Liquidation of Debts and Assets
In Chapter 7, all debts are discharged, meaning erased, except those that the person wishes to keep. If they want to keep their car, they have to keep their car payment. Likewise, if they want to keep their home, they have to keep their house payment. If a person is only a few months behind on their mortgage, chapter 7 can be used in a "work-out" situation. A chapter 7 can leave a person with only their basic living expenses. Other debts like credit cards, doctor bills, and even some taxes no longer need to be paid freeing up money to catch up with the mortgage payments. It is sometimes possible to enter into a " reaffirmation agreement" that modifies the terms of the mortgage and makes it more affordable. One thing a chapter 7 cannot do is force creditors into a repayment plan. So, if the mortgage payments are too far behind, and the lender doesn't want to deal, a chapter 13 would be a better option.
If you have mainly consumer (not business or investment) debt, a "means test" will determine if you can file a Ch. 7. While there are some exceptions, if your income is over the amount allowed for your family size, you have to file a Ch. 13. (See the income chart here.)
2. Chapter 13: Reorganization of Debt
Chapter 13 is a reorganization of debt. Creditors are divided into groups including "secured" and "unsecured." A secured debt has collateral or security. On a car loan, the car is the security. If you don't make the payments the loan company can come and repossess the car. In the case of a mortgage, the house is the collateral. If you don't make the house payments, they can file foreclosure. Unsecured creditors include credit cards and doctor bills and have no collateral or security. In a chapter 13 case, regular payments must usually be made through the court to secured creditors if the person wants to keep the collateral, meaning the house or the car. If the person is behind in their payments, the amount they are behind is put into a payment plan and spread out up to 60 months. For example, if a family's regular mortgage payment is $2000, and they are five months behind, the arrearage is $10,000. In chapter 13, they would pay their regular payment of $2000 plus $167 per month (10,000 divided by 60 = 167). As long as they make the payments in the chapter 13 payment plan, the lender cannot foreclose.
Unsecured creditors usually get a small percentage of the total they are owed.
File 13 to force the mortgage company into a payment plan to get caught up.
Lien Stripping. It is also possible to eliminate the second mortgage if it has no equity. If the first mortgage is greater than the value of the house, subsequent liens like second mortgages and home equity lines of credit can be stripped away because they are no longer secured by equity.
C. Pre-Bankruptcy Credit Counseling
Before a bankruptcy can be filed, the debtor must attend "pre-bankruptcy credit counseling" with an approved agency. This to ensure the debtors know about any options they may have other than bankruptcy. A certificate of completion of the credit counseling must be filed with the Court at the time the bankruptcy petition is filed. The cost of the counseling can be anywhere from $15 to $50 per person depending on the agency. A complete list of the approved agencies for the Middle District of Florida can be found here. (Approved Providers)
D. Gather your documents.
Part of every bankruptcy petition is a 6 month financial history of the debtor. The Trustee appointed to the case can ask for more information but this is the usual list. (More about the Trustee below)
1. Tax Returns. Two years for a Ch. 7, three years for a Ch. 13.
2. 6 months of pay stubs or proof of income.
3. Certificate of Pre-Bankruptcy Credit Counseling.
4. Bank Statements.
E. Prepare the Bankruptcy Petition
All the information mentioned above is put into the official forms known as the bankruptcy petition, schedules, and statements. It usually ends up being 50 - 60 pages long and must be signed in several places under penalty of perjury. In a Ch. 13 case, a proposed payment plan is calculated, prepared and filed. The Petition is probably the most detailed and technical document you will ever sign. You might want help.
F. File the case.
Once the petition and all attachments are filed with the court and the filing fee paid, an injunction called the "automatic stay" goes into effect that prohibits any creditor from taking any collection action without the permission of the Bankruptcy Court. Normally the automatic stay is en effect from the filing date until the discharge date. The discharge is when the judge signs an order ruling that the debts are discharged or uncollectable.
Post-Petition (after the filing)
The "341" or Meeting of the Creditors.
About a month after the case is filed a "341" or Creditor's Meeting is held. They should change the name. Creditors rarely come anymore. It should be called the Trustee's Meeting. A Trustee is appointed to administer the "estate". The Trustee's job is to conduct the 341 meeting, swear in the debtors and examine them about the information in the petition.
If in a Ch.7 case, the debtors have more assets than they are allowed, they must either turn something over or pay the Trustee who then makes a distribution the creditors. In a Ch.13 case, the Trustee's job is to collect the monthly payments and distribute money to the creditors according to the "Ch. 13 Plan". At a Ch.13 meeting, the Trustee usually only discusses the details of the Plan that has been filed with the Court.
Most 341 meetings take only 5 minutes and are very low key. Most of the time my clients ask me as we are leaving the hearing room, "That was it? That was all?" The better the job preparing the petition, the easier and shorter the creditors meeting. Short is good. I like short.
Chapter 7
If the Trustee does not find assets to be distributed, a "No Asset" report is filed and the case will normally close two to three months later. If the Trustee is able to collect money or assets, all creditors are notified and a distribution is made based on the Proof of Claim filed by each. An asset case can last well over a year.
Chapter 13
The first Ch. 13 Plan payment is due 45 days after the case is filed. Creditors are given the opportunity to file a Proof of Claim if they want to receive money from the plan. Several months later, a Confirmation Hearing is held. The Judge will review the proposed Plan with the Trustee, the Debtors, the Debtor's attorney and any creditors who wish to appear. The confirmed plan can last up to 60 months. The Judge will sign the discharge after the successful completion of the Plan.
Debtor Education
Within 90 days of the filing date, the Debtors must attend a three hour Debtor Education Class that teaches the basics of personal finances. This can be done in person or online. On the Bankruptcy page of this website is a list of the approved course providers. Most of the agencies that provide Pre-Bankruptcy Credit counseling also provide the Debtor Education Classes. In Orlando, the Chapter 13 Trustee provides this class free of charge on most Thursdays after the 341 meetings.
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