What You to Know About the Bankruptcy Process
Bankruptcy is a very complicated process. There are many options of how to proceed, and numerous very important decisions to make along the way. This article outlines some of the things you will need to know to help you with decisions you will have to make along the way, such as whether or not you should use an attorney to file bankruptcy and which bankruptcy chapter you should file under. It also outlines some basic information about how the bankruptcy process works, such as who are the main parties involved in a bankruptcy proceeding, what exemptions are, how much it costs to file bankruptcy, and how bankruptcy ends.
Deciding whether or not to use an attorney
You are not legally required to use an attorney. However, bankruptcy is a complicated process, and there are many decisions to be made along the way, such as choosing which Chapter to file under, and how to deal with assets and exemptions. You are strongly advised to use an attorney when filing bankruptcy. Many attorneys offer their original consult for free, which is a great no-obligation way for you to decide whether or not you feel comfortable working with them.
If you are reluctant to use an attorney, there are other options:
Instead of working with an attorney, you do have the option of hiring a petition preparer who is a certified paralegal. Petition preparers are a lot cheaper (usually $250-300), but they are not allowed to give you any legal advice; they may only help you navigate the forms for a bankruptcy. You can find these preparers online.
Use this service only if you know you cannot afford an attorney, and have researched all of your debts and are confident there are no irregularities which will cause problems. There usually more problems with petition preparers than attorneys, so make sure your petition preparer is certified and trustworthy.
Your other option is simply to do it yourself, which is known as “pro se.” This is not recommended for most filers. Although the information on this site can serve as a guide for pro se filers, bankruptcy law is very complex and not easily explained. There is no way that we can cover everything you need to know about bankruptcy here, or explain all the specific situations that any one case may possibly encounter. An experienced attorney will make sure that you don’t make costly mistakes.
Many pro se filers end up having serious problems with their case. Some end up filing bankruptcy needlessly, when other solutions would have worked better for them. Many pro se filers make mistakes in their cases, such as filing under the wrong chapter, failing to file all of the required documents, or choosing their property exemptions incorrectly - all of which can prove to be expensive, even personally devastating. Therefore, even though filing pro se is permitted, we do not recommend that you try to file bankruptcy without the help of an attorney who is working in your own best interests.
Deciding which bankruptcy chapter to file under
You will need to consult with your attorney, and review all of your assets and debts together with him or her, in order to decide which bankruptcy chapter will work best for you. If most of your debts are unsecured debts, then Chapter 7 may be a better option as it can completely wipe out those debts. If many of your debts are secured debts, and you would like the option of reorganizing those debts and keeping your home or your car, then Chapter 13 may be a better option.
There are eligibility concerns, as well. If you do not pass the Means Test (in other words if it is deemed that you have enough income to be able to repay your debts) you may not qualify for Chapter 7, and your only option may be Chapter 13.
There are many other variables, too, such as what your state’s personal exemptions are, and what your own personal long-term goals are. No one rule fits all. That’s why it’s very important to get qualified professional advice, especially at this early stage when you are still making these important decisions.
Parties involved in bankruptcy cases
Part of understanding how the bankruptcy process work relies upon understanding who are all of the people or entities involved. Here is an overview of the main parties who will be involved in a bankruptcy proceeding:
The debtor is the person or company that owes the money. If you are the one in debt and filing for bankruptcy, then you are the debtor.
The creditor is the person or company that extends the credit: in other words, any person or company that you owe money to. Personal creditors are people - family or friends - who you owe money to. Real creditors are the creditors who you have legal contracts with regarding the money you owe them, such as your bank or a finance company. Most debtors have numerous creditors.
Chapter 7 trustee / Chapter 13 trustee
The trustee is a person appointed by the court to oversee and administer the case when you file bankruptcy. Their main roles are to make sure that you have disclosed all of your relevant financial information, and to make sure that the case proceeds fairly and as specified by law.
The trustee will review the papers you submit as part of your bankruptcy petition, and will verify that the information you have submitted is correct. They may also review your past financial records, to make sure that you didn’t make any preferential payments to certain creditors in the 90 days before filing, or to friends or family members in the year before filing. They may also review any liens on property, such as on a car loan, and remove them if there are any problems with them, for example if they have been improperly recorded, so they can liquidate the property.
A month or so after you file your petition, your trustee is responsible for conducting a meeting between you and your creditors (although creditors usually choose not to attend, unless they believe you are trying to hide assets).
Then, in Chapter 7 bankruptcy, the trustee will review the value of your non-exempt assets, and liquidate (sell) those assets in a way to maximize the return to your creditors, and to distribute that fairly among them. If there are no non-exempt assets to sell, the trustee communicates that through a report to the creditors.
In Chapter 13 bankruptcy, your petition will also include a proposed repayment plan. The trustee will review all of your financial information, to make sure that it is accurate, and they will also review your creditors’ claims against you. The trustee must ensure that your repayment plan is realistic (in other words, that your expected income is enough to be able to make the payments), that it is fair to your creditors, and that it complies with bankruptcy law. The trustee is in charge of administering the plan, which means receiving your monthly payments, distributing those funds to your creditors, and keeping an account of how much has been paid out to each creditor.
United States Trustee
The trustee who is appointed to handle your bankruptcy case is sometimes called the “case trustee.” However, there is another trustee, called the United States Trustee, whose role is important as well. The United States Trustee oversees your case, even though you most likely will never have any direct contact with them.
The main function of the United States Trustee is to ensure that there is no abuse of the bankruptcy system - in other words, that debtors who do have the means to pay are not simply trying to find a way out of their financial obligations.
In a Chapter 7 bankruptcy, one of the important roles the United States Trustee performs is confirming that you have qualified under the Means Test. If you have not qualified under the means test, the United States Trustee may determine that you are filing under a “presumption of abuse” and may file a petition to have your bankruptcy case dismissed. You have three options at this stage:
- opposing that dismissal by defending your motion
- converting your Chapter 7 case to a Chapter 13, or
- agreeing to dismiss the case.
The United States Trustee also works to monitor and review your Chapter 7 or Chapter 13 bankruptcy case as it progresses, keeping track of record-keeping and fees and reviewing information as it is received.
The bankruptcy judge is the chief officer of the bankruptcy court. Each judge is appointed by the court of appeals of the United States for a term of fourteen years, to serve in a particular judicial district (or, with special approval, they may also serve in other,nearby districts).
The bankruptcy judge hears the arguments made both by the debtor and by the creditors. The judge will determine whether the debtor qualifies to file bankruptcy in the first place, and if the filing is under the correct chapter. Although the trustees do most of the negotiation between the debtor and the creditors, the judge must sign off on the motions and petitions made during the bankruptcy process.
As we’ve already stated (and contrary to what many people believe), bankruptcy does not mean you have to give up everything you own. You can exempt some of your property and possessions - or in many cases, all of it - from the bankruptcy.
How exemptions work is extremely complicated, so we have devoted three separate articles to exemptions: a general overview of how to exempt (keep) property through bankruptcy, as well as more details on dealing with your family home and mortgages during bankruptcy, and keeping or exempting with other secured assets such as cars.
The rules about exemptions vary substantially between states. In some cases you can exempt specific items entirely, such as your family jewelry or your tools of the trade. However, in other cases you may only exempt up to a certain dollar value - for example, a portion of your equity in your home or a portion of the value of your car.
If you are filing Chapter 7, any assets you exempt remain outside of the bankruptcy. In other words, the trustee cannot sell them and you will not have to give them up. In Chapter 13, where there is a repayment plan that you must follow, you will be required to repay your non-priority unsecured creditors an amount equal to the value of your non-exempt assets. In other words, the more assets you can exempt from the bankruptcy, the less you will have to pay in total.
Understanding exemptions is hard, because there is so much to know. But understanding exemptions is one of the most important aspects of your bankruptcy plan, because the assets you exempt represent what you get to keep.
It’s important understand all of the options available to you regarding your exemptions, so you can maximize the benefits of bankruptcy: get rid of your unmanageable debts while keeping as much of your property as the law permits. For this reason, we are devoting several articles to providing a detailed look at exemptions - as well as recommending that you obtain professional legal counsel.
Fees to file bankruptcy
Costs of filing Chapter 7
Filing requires payment of a $335 fee (comprised of a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge). Normally this fee must be paid in full upon filing, but in some cases the court will grant permission for the debtor to pay it in up to four installments over up to 120 days. In some jurisdictions this may be paid within 120 days of filing. Others require a portion of this fee to be paid up front. Some people may not qualify to pay this fee after filing, and must pay it up front. If the debtor’s income is less than 150% of the poverty level, the court may waive the fees entirely.
Other costs for filing Chapter 7 include between $50 and $100 for the obligatory credit counseling and financial management courses, as well as between $1000 and $2500 in attorney fees. The exact legal costs depend on the attorney, your location and the complexity of the case. The more complex your finances, the more this will likely be.
In summary, total costs for filing Chapter 7 can range from around $1500 to $3000.
Costs of filing Chapter 13
The cost of filing Chapter 13 includes a $279 court fee. This can usually be paid as part of your repayment plan. Other costs include the obligatory credit counseling/financial management courses, for a total of around $50 to $100, plus attorneys fees. These are generally higher for filing Chapter 13 because of the greater amount of work involved in coming up with the repayment plan. Typical legal costs are between $3000 and $4000. Some jurisdictions have caps on this fee. Many attorneys only ask for a portion of the payment up front, with the rest to paid out of your plan payments.
How bankruptcy ends: discharge, denial or dismissal
Bankruptcy can end through either a discharge, a denial of discharge, or dismissal.
A successful bankruptcy filing ends in discharge: the debtor has repaid what they are reasonably able to repay (which, in Chapter 7, may be nothing or it may be a small portion of the total owing via sale of assets, and in Chapter 13 will be via the repayment plan). This means that you are then discharged from ever having to repay any of the remaining funds that were owed.
A discharge is a legal elimination of a debt. The former creditors have no further legal right to pursue debts which have been discharged. (It’s important to keep in mind, though, that even though debts are eliminated through bankruptcy, liens survive the bankruptcy and will still be enforceable).
There are two other ways that a bankruptcy case can end.
One is denial of discharge which, fortunately, happens only rarely. A discharge may be denied if a debtor has tried to take advantage of the bankruptcy system, or tried to abuse it, as a way of avoiding debts that they should pay off and that they have the means to pay off. Some of the acts that might lead to denial of discharge include:
- transferring, concealing or destroying assets or financial records
- making a false statement on the schedules or under oath
- failing to keep books and records of your financial situation.
Denial of discharge is comes with a serious penalty against the debtor, because it means that any of the debtor’s debts which could have been discharged through bankruptcy are now ineligible to be discharged in any subsequent bankruptcy. Denial does not stop administration of the case, however - the trustee will still gather and liquidate the non-exempt assets of the estate and use those funds to repay creditors, even though the debts will not be discharged.
A final way that a bankruptcy case may end is by dismissal. Dismissal is termination of the case without either a discharge or a denial of discharge. A bankruptcy case maybe dismissed because the debtor failed to file some of the forms by the required deadlines, or if the debtor fails to qualify via the Means Test, or as a light penalty for minor errors or infractions of bankruptcy procedures.
The debtor may choose to dismiss the case if they do not want to provide required documentation or for some other reason decide not to proceed with the bankruptcy. As we’ve noted elsewhere, if you have had one or more bankruptcy filings dismissed within the last year, those dismissals will adversely affect whether and how an automatic stay is imposed on any future filing.
If you are honest about all of the information that you provide, both verbally and on the forms you fill out, and if you attend all required meetings and follow all the directions given by your attorney, the trustee and the court, it is unlikely that your case will be dismissed.
Read on for our next article in this series: Determining Eligibility for Filing Bankruptcy