Saturday, January 24, 2015

How the Bankruptcy Process Works

This is a post by Nancy Evans.

No matter how thrifty you are, you can’t plan for everything. An accident or sudden illness could cause you to lose your job and destroy your savings. A single night in the hospital could easily cost over $20,000. There is the case of the English couple with that was facing a bill ten times that size after the premature birth of their son. Even with health insurance, you could be liable for a percentage of the cost--and that percentage could wipe out your savings.

Hospital bills aren’t the only major setback one could face, but they are one of the major reasons why even the most conscientious of savers can end up in dire financial straits.

When faced with a devastating financial crisis, you can try to tough it out, or you can use a safety net that was created specifically to help consumers cope with suffocating debt: bankruptcy.

People Who File Bankruptcy

People seem to have the same opinion of bankruptcy that they do about the mental health system. The same way the people believe that you should be able to get over depression and other mental illnesses, people also tend to believe that you should be able to get through any financial hardship by keeping calm and carrying on. There’s this idea that the people who resort to bankruptcy (or, for that matter, mental healthcare) are somehow broken – too weak to handle to their business like adults.

The truth is that people who file bankruptcy come from all walks of life, all socio-economic classes, all ethnicities, and all education levels. Some of them have horrible money management skills, but some have accountant-level money juju. The only thing all of these people have in common is that their financial situation has gotten out of hand, despite their best efforts.

The other truth is that the people who file bankruptcy number in the thousands, which means they are more common than you realize; yet for every person who does file, there is at least one more that is too afraid or too ashamed to take that step.

People who file bankruptcy are not deadbeats; they are people who realized that the only way to fix their financial problems was to hit the reset button.

Types of Bankruptcy

There are two types of bankruptcy available to consumers, Chapter 7 and Chapter 13.

·  Chapter 7 is primarily for people who are considered insolvent. That is, regardless of the amount of your debt, you do not have the means to pay any of it back.

·  Chapter 13 is primarily for people who may be able to pay some of their debts, but not all.

There are other aspects that differentiate the two chapters, such as whether or not you have any assets. A lawyer that specializes in Chapter 7 and Chapter 13 bankruptcy can help you determine which one is right for you.

The Bankruptcy Process

The process of filing is similar for both chapters. Where they differ is in how your debts are handled by the court appointed trustee and the outcome.

·  With a Chapter 7, all of your eligible debts are discharged, and you start over with a clean slate;

·  With a Chapter 13, some of your debts are discharged and the rest are included in a repayment plan to be managed by the court-appointed trustee.

Below is a brief look at the bankruptcy process.

Step 1: Credit Counseling

Everyone must get mandatory credit counseling, from an approved agency, within the six months prior to filing bankruptcy. The U.S. Department of Justice website has a list of approved credit counselors for each State, however your attorney can also provide that information.

Step 2: Filing Your Petition

Once you have paid your lawyer his fee, he will file all of your paperwork with the courts. This will include your petition for bankruptcy, a list of all of your creditors and debts, as well as your income and expenses.

The average cost to file bankruptcy is $1,500. The actual cost depends on your state, your lawyer, and the type of bankruptcy you file.

Once your lawyer has filed your petition, you will need to take a financial management course and provide proof of completion. Those filing Chapter 13 might also need to make the first proposed plan payment within 30 days of filing.

Step 3: The Creditor Meeting

Once the court has appointed a trustee to go over your case, you and your attorney must meet with your creditors in court to discuss your debts and finances.

For those filing Chapter 7, the creditor meeting is pretty much the end of the process; everything else happens on the back end. The trustee will determine which property is exempt and which will need to be returned, and he will deal with all your debt. If all goes well, you should get a discharge three to six months after you file.

Those filing Chapter 13 will need to attend a confirmation hearing, where the bankruptcy judge will decide whether or not to approve the proposed payment plan. Once the judge approves, you will make your plan payments for the amount and period of time specified by the courts.

Life has a crazy way of catching us off guard. Emergencies and sudden disasters don't announce themselves beforehand. Even with all the technology we have, scientists can still only predict an earthquake about 15 seconds to a minute in advance. Financially, you must be prepared to take the uncertainty of life in stride by understanding how you can minimize and manage your losses. For many business owners, bankruptcy law is a crucial step in this understanding.

See my disclaimer.

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