The First Steps
Before we look at how to file for bankruptcy, let’s first determine if you are actually bankrupt. Using the guideline of the Chapter 7 bankruptcy laws, you would be considered bankrupt if your liabilities exceed your assets. In simple terms, this means that if you were to sell everything you own, down to the last shirt, and used that cash to pay your bills, and it was not enough to pay off all your debts, then you would be considered bankrupt and a potential candidate for filing for bankruptcy.
For example, say that you have a house, household furniture, a car and a savings account, and these could all be sold for $150,000.00. This amount would be the value of your total assets. Next we would add up your debts. In this example, you have credit card debts, a mortgage, a car loan, and several large unpaid medical bills, and all these total $175,000. Since $175,000 (the amount of your liabilities) is larger than your assets ($150,000), then you could be considered bankrupt.
Getting a Fresh Start
Chapter 7 bankruptcy is considered a fresh start. These laws allow for all debts to be completely written off. You may choose to keep and continue to pay certain debts, so that you may keep property that secures the debt.
Chapter 7 bankruptcy laws also require that you pass the means test. Briefly, this compares the gross annual income of your household to a state median. If your income is higher than the median, you may not be eligible. You may instead have to file for a Chapter 13 bankruptcy, which is where you make controlled monthly payments that are then distributed among your creditors.
One last consideration is an examination of your monthly income and your allowed monthly expenses. To file for Chapter 7 bankruptcy, your monthly income should be equal to or less than your monthly living expenses, such as your housing and food, insurance, utilities, personal care, transportation, and medical bills. If your calculated income exceeds your allowable monthly living expenses, then you may also be required to file a Chapter 13 instead.
So how do you start in filing for Chapter 7 bankruptcy? The first step is usually to have a consultation with your bankruptcy attorney. For this initial consultation, you should bring a general listing of your total assets and your total debts, a listing of your monthly income and monthly expenses, your year-to-date income, and your tax returns from the prior year. Your attorney will need this so that he/she can make a preliminary determination if you should be eligible.
If you appear qualified, then your next step is to receive a credit counseling certificate from a court approved debt counseling service. Completing the credit counseling course and receiving a certificate of completion is required before you may file for bankruptcy. The credit counseling class will review your income and expenses and help you create a reasonable budget.
Gather Your Information
Now it’s time to gather up all your financial data to give to your attorney. The Chapter 7 bankruptcy laws require that you report every detail of your current finances and a general picture of your financial activities for the two years prior. Your attorney will require your last two years of tax returns, the last six months of your paycheck stubs, a listing of everything that you own and a listing (or the actual bills and statements) of all your debts. You will also need to provide proof that you have properly valued the items that you own. Your attorney may request appraisals of certain items, such as your house and cars. It is highly recommended that you request a copy of your credit report so that you can be certain that you have listed all of your debts.
Your attorney will ask you to provide very detailed information. All of your financial data will be examined and reported. Recent sales of property, donations of cash or property and even large recent payments on your debts must be reported. All of your debts, including account numbers and amounts owing, and the addresses of your creditors, will be listed. None can be omitted from the petition, even if you plan to pay them in full.
What to Keep - What Gets Sold
Another important step is determining which of your possessions and investments you are able to keep and which must be sold to pay debts. Some states have their own exemption guidelines and some states simply use the Federal guidelines. You will be able to keep some equity in your home, some cash and investments, and some personal property. Retirement investments are generally exempt. As a general guideline, you may be allowed to keep $15,000 equity in your home, $8000 of personal property, and $300 in cash and investments. If you are filing for bankruptcy jointly with your spouse, the exemption limits are usually doubled.
Reference US Code Title 11 Sec 522 for more specific information on exemptions.
Your attorney will now prepare a document, called a petition, which lists all of your financial details. This will be filed with the court and all of your listed creditors will be notified that you have filed for Chapter 7 bankruptcy. A hearing will be set and a trustee will be appointed to oversee your bankruptcy. Creditors will be given the opportunity to object and/or to arrange for the return of property used as collateral on debts. You will be required to attend an additional credit counseling class.
After the hearing and the required waiting period, the court will issue a notice that your debts have been discharged and that your case is closed. Good luck with your fresh start!
This article is not intended to give any specific legal or other professional advice. This is a general guideline only and will be affected by your individual circumstances and the rules of your local courts. It is subject to change as the bankruptcy codes change. Please seek the advice of a bankruptcy attorney for specific information.