What to Expect When You Get to Bankruptcy Court
Filing for bankruptcy is a different legal process than if you were to commit a crime or file a lawsuit against someone. For one thing, all bankruptcy cases go through bankruptcy court, a special federal court established specifically to hear bankruptcy claims.
Your experience in bankruptcy court will depend on a number of factors, including what type of bankruptcy you wish to file for. Before you file for bankruptcy, you should set up a consultation with a knowledgeable bankruptcy attorney, who can help prepare you for what to expect in court.
Choosing the Type of Bankruptcy
The decision to file for bankruptcy is not an easy one. However, if you are unable to pay more than the minimum amount on your bills or don't foresee yourself getting out of debt within the next five years, it may be the best option for you.
You will have to decide what type of bankruptcy to file. This will depend on your specific circumstances as well as something called the means test.
One type of bankruptcy for individuals is called Chapter 7 bankruptcy. Chapter 7 is a type of bankruptcy where a person's assets are sold and the money is used to pay off most of an individual's debt. Some or all of the debt that remains is then forgiven.
The other common type of bankruptcy for individuals is called Chapter 13 bankruptcy. Chapter 13 allows the debtor to establish a repayment plan to pay back creditors, who are the people or entities owed money. Once the debtor fulfills the payment plan, a bankruptcy court will make sure any remaining debts are discharged. Bankruptcy discharge means you are no longer liable for your debts.
If you have a steady income and some disposable income, you will want to file for Chapter 13, which will allow you to hold on to your belongings while making regular payments. Although Chapter 7 does not require you to make payments, many of your assets will be taken from you and sold.
Chapter 11 bankruptcy is another form of bankruptcy also available to individuals. Chapter 11 is similar to Chapter 13 in that it allows individuals to reorganize their debts and come up with a repayment plan. It is usually used by people whose debt amounts exceeds Chapter 13's statutory limitations.
The Chapter 7 Means Test
In 2005, Congress enacted a new law called the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This act, in part, established a means test to determine whether an individual can file for Chapter 7.
This test uses a formula to see if you can pay at least 25 percent of your non-priority unsecured debt, which includes credit card debt. If you can pay 25 percent you will not be able to file for Chapter 7 bankruptcy.
In addition, your income will be compared to your state's median income. If your family's combined gross income is greater than the median family income in your state, then you may also be barred from filing Chapter 7 and instead be required to file for Chapter 13 or Chapter 11 bankruptcy.
In addition, the BAPCPA requires that you receive credit counseling six months prior to filing for bankruptcy. The session with the credit counselor must last for 90 minutes.
Filing for Bankruptcy
To file for bankruptcy, you will have to file a petition with the proper bankruptcy court. In addition, you will need to pay the associated filing fee.
You will also need to fill out a form called the Statement of Financial Affairs. This form will require you to list in detail information about your assets, debts, expenses, and income, as well as the names and addresses of your creditors.
Inside the Bankruptcy Court
Once you file for bankruptcy, the bankruptcy court will issue an automatic stay on all your debts. An automatic stay means that creditors are barred from making collection attempts on your accounts without the permission of a bankruptcy judge.
The court will also appoint a trustee at this time. The trustee's duties will depend on what type of bankruptcy you have filed.
If you have filed for Chapter 7, the trustee will seize your non-exempt assets, which may include cars and houses, and sell them in order to pay off your creditors. If you are filing for Chapter 13, the trustee will review your debt repayment plan before handing it off to your creditors for their review.
If filing for Chapter 7, you will also have to attend what is known as a 341 hearing. The 341 hearing is also referred to as the meeting of creditors. This is when the debtor appears in bankruptcy court under oath, and the creditors, along with the trustee, have the opportunity to ask the debtor questions about his or her assets, debts, income, and expenses.
You may also be required to bring certain documentation to the 341 hearing, including proof of your income, bank statements, and proof of expenses.
Once you have either completed the Chapter 7 or Chapter 13 process, a bankruptcy court will discharge your debts. However, some debts cannot be discharged by bankruptcy, including student loans, alimony, and child support.