Ben Todd | Jun 2, 2017 | 1
How to Declare Bankruptcy In The USA
In this article you will find out how to file for bankruptcy. You start by filing a petition with the bankruptcy court, and your bankruptcy case begins. If you want to jump right to it without reading this article, then start with electronic filing here. If you would like to learn a little more before filing your petition…then read on. There is a US bankruptcy code that is followed by the federal courts when they deal with your case/petition. They deal with your bankruptcy, and in many cases, you eventually find yourself in a position where you may now afford to live and/or prosper because you have fewer or no debts.
Please understand that bankruptcy is not a way of wiping the slate clean, you may still end up in debt for the rest of your life, the courts will take almost everything you own, and only the most desperate or predatory creditors will deal with you in the near future until you rebuild your credit rating in the distant future.
Which Bankruptcy Chapter To Choose
If you are filing as an individual, then depending upon your circumstances, you may choose chapter 7 bankruptcy or chapter 13 bankruptcy. Cities, villages, towns, municipal utilities, school districts and taxing districts may file for Chapter 9 if they wish to reorganize. A business may file for chapter 11 to reorganize or chapter 7 bankruptcy if a business wishes to liquidate. If there are parties from more than one country, then chapter 15 bankruptcy must be filed, and chapter 12 bankruptcy is for fishermen and family farmers looking for debt relief.
|Suitable Candidates||Preferable Chapter|
|Family farmers and fishermen||Chapter 12|
|Individuals depending upon case specifics||Chapter 7|
|Individuals depending upon case specifics||Chapter 13|
|Business wishing to liquidate||Chapter 7|
|Bankruptcies involving parties from more than one country||Chapter 15|
|Businesses wishing to reorganize||Chapter 11|
|Cities, villages, towns, municipal utilities, school districts and taxing districts||Chapter 9|
Get a fuller explanation of the chapters with our article about which chapter to choose.
What Is Bankruptcy All About?
It first existed in the USA in 1934 when the US Supreme Court invented bankruptcy law. The aim of bankruptcy is to give a debtor a fresh start without the burden of debts. Since that time, the notion, the process, and the meaning of bankruptcy has changed, but overall the intention is the same today as it was back then.
Back in 1934, the point of bankruptcy was to give an honest debtor a new opportunity to continue living without the discouragement and the pressure of preexisting debt. It gives the debtor a fresh start without being hampered by debts.
The original goal of bankruptcy, and its essence (point) in our time, is to release a debtor from any personal liability for specific debts so that creditors may not pursue action to collect said debts. However, due to governments being lobbied, and due to US citizens over reliance upon bankruptcy, the rules have changed over the years.
Some bankruptcy cases end with just some of the debt being removed and not all of it, so the debtor is still wildly in debt at the end of it, but the debt amount is something that the courts figure he/she/they/it can afford. In addition, if you have assets such as a house, savings account and so forth, then you can wave goodbye to them when you go bankrupt because the federal court is not going to let you get off scot-free.
Going Bankrupt Will Not Erase Your Co-Signers Debt
Co-signers and guarantors are treated almost the same if you go bankrupt. If you go bankrupt, then your co-signer will still be on the hook for the money that was borrowed. The same applies to guarantors; however, the bankruptcy court will make a concerted effort to come after the guarantor to clear the debt during the bankruptcy proceedings.
Regarding a co-signer, he or she is still on the hook for the debt, but the courts will not demand its settlement right away. For example, if the co-signer was paying $300 per month prior to you filing for bankruptcy, then the co-signer may simply be allowed to continue on paying $300 until the debt is cleared. If you become bankrupt, then your co-signer becomes the only person responsible for the debt, and the debt is not halved, which means the co-signer will be lumbered with the entire amount.
What Rules And Codes Govern Your Bankruptcy?
The federal courts follow the 1978 bankruptcy code, which is a code that has been amended many times since it was first enacted. The most notable changes happened in 2005 when it became significantly more difficult to go bankrupt and get away scot-free. The procedure itself is undertaken by following what people call the bankruptcy rules. These rules are the procedural aspects, and you may hear your lawyer call them the Federal Rules of Bankruptcy Procedure.
The USA has 90 bankruptcy districts, which means each judicial district has at least one bankruptcy district and some have more than one. The federal court in your judicial district will follow the bankruptcy code, the bankruptcy rules, and their local rules. In most cases, each court will have its own clerk’s offices.
A United States bankruptcy judge is the person with the power to make the final decision over each case/petition. The judge is a judicial officer of the district court located in the USA. That same judge is responsible for decisions related to the proceedings, such as if the petitioner is eligible to file, or if the petitioner (debtor) will eventually have his/her/their debts discharged.
More Chapter Filing Rules
If you have filed a petition, then most of the process will involve administration of one type or another, and much of it will be conducted away from the federal courthouse. Some chapter filing will be carried out with the use of a trustee who oversees the case. Trustees are usually used with chapter 13, 12, 7 and sometimes chapter 11 cases.
Since most of the process is administrative, you (as a debtor) are going to have very limited involvement or interactions with a bankruptcy judge. For example, if you file for chapter 7 bankruptcy, you probably won’t see a judge at all unless somebody or some organization raises an objection. When chapter 13 cases are filed, the debtor will usually see the judge when a plan is confirmed.
If there are formal proceedings taking place, it is then when a debtor will have to appear at the offices of a US trustee where the debtor will meet with creditors. The bankruptcy code that requires the debtor to turn up to the meeting is called bankruptcy code 341, so the meeting with creditors is usually called the 341 meeting. During formal proceedings, the creditors are allowed to ask the debtor about current property, assets and debts.
Your First Steps Towards Bankruptcy
Your first step should be to seriously consider all other options before you think about bankruptcy. If you go bankrupt, then your credit rating will be stained for a long time and your chances of getting favorable interest rates and favorable borrowing options will disappear, and some people’s credit rating never recover. The stories you hear about people going bankrupt and then buying a house in five years are deceptive. You may buy a house in five years and get a mortgage after being bankrupt, but it will be an uphill struggle from the moment you apply for a mortgage until the day you pay it off.
Consider calling all your creditors, explaining your circumstances, and trying to get lower interest rates and/or a more favorable repayment option. Mention that you are trying to find a way so that you do not go bankrupt, and try to talk to the most senior person you can get hold of. Think about calling a debt management company, or getting another job in addition to your current job, or even consider a consolidation loan. There are many times where we at echeck suggest that you work on your credit rating for over six months and then try for consolidation loans. You may be in debt for years, but it is often preferable to going bankrupt. This is especially true if in the future your income increases and you find you are able to pay off your debt quicker than you first thought.
Finally, all-consuming debt is often a symptom of poor discipline, poor financial planning and poor financial decisions in general. Those are the things you really need to work on before you make another decision that may affect the rest of your life.
Consider Alternatives To Going Bankrupt
If you are swimming in debt and you cannot afford your next set of repayments, you may be tempted to file for bankruptcy. This is especially true if your income has just become significantly lower and/or you are out of work. However, bankruptcy is a big step, so here are a few other things you may like to consider first.
- Sell your assets and use them to pay off your most urgent debts
- Get another job and/or another source of income
- Rent out one of your rooms, rent out your car or some of your assets
- Get a consolidation loan
- Work on your credit rating for six months and then get a consolidation loan
- Contact your creditors, tell them your problem, and arrange better terms
- Ask your creditors if you can have a repayment break
- Contact your creditors and asks for lower repayments
- Lower your outgoings and live below your means (poor) for a while
- Ask family members or friends to assume your debt and give them a promissory note
- Transfer your credit card debt to a zero interest card for a temporary break
- Contact or consult a reputable debt management company
- Restructure your mortgage to avoid losing it by going bankrupt
- Get a consolidation loan with a guarantor or co-signer
- Search out any legal and morally correct methods to at least delay bankruptcy
Understand That Not ALL Your Debt Will Be Cleared/Wiped
There are numerous types of debt that simply cannot be discharged (wiped clean/erased). If the majority of your debt cannot be erased, then it is highly recommended that you do not file for bankruptcy. Again, if you analyze your debt and see that more than 50% will not be erased–then bankruptcy is not a smart move. The only way you should consider it is if your current repayments are woefully unaffordable and you are incurring more and more fees and charges that are making your situation worse. Even in that case, you should consider some of the options laid out in the section above before you think about bankruptcy.
Here are the types of debt that cannot be discharged as of the bankruptcy code amendments made in 2005. Take note that this is not a comprehensive list* and please remember that the rules change, so double check with your attorney or paid advisor before filing for bankruptcy.
* This list is comprehensive at the time of writing, but things change and it is possible that your state (judicial district) has its own rules that differ from the US State norm.
Debts That Will Not Be Discharged
- Loans that were obtained fraudulently
- Debts from personal injury while breaking the law
- Any debt as a result of you driving intoxicated
- A secured loan where the secured property is still owned
- Debts from malicious or willful damage to property
- A secured loan where your property was given away
- Debts from malicious or willful injuries to person(s)
- A secured loan where your property was sold for less than market value
- Some types of student loans
- Most types of taxes are not wiped
- Child support debts of any type are not erased
- Alimony cannot be wiped unless it is forgiven or removed prior
- Debts after your bankruptcy petition is filed are not discharged
- Some debts incurred up to six month before filing are not considered
Understand Which Assets Will Be Seized
Chapter 7 bankruptcy means that most of your assets will be seized. Chapter 13 will allow you to keep one or more of your most valuable assets, which usually means you are able to keep your house. Some of your items and/or assets are protected from the bankruptcy court’s attempts to seize and sell. The type of bankruptcy you file (the chapter type) and your state laws will dictate which assets are protected. Usually, you are allowed to keep wedding rings. You may also keep your car if it is worth less than $5000.
The Wildcard Pseudo-Myth
I call it a pseudo-myth because the wildcard rule varies from State to State, and much of the anecdotal information surrounding it is highly suspect. Family heirlooms are sometimes referred to as “Wildcard” exceptions where states may allow you to keep one or two things of value.
Some people are allowed to keep items of proven sentimental value that have been in their family for generations, though they have to prove that the item is a family heirloom and the courts may simply deny your filing if you demand to keep too many heirlooms, especially if the family treasures have a very high value. In most circumstances, you have to give up your valuable heirlooms and treasures, but with the wildcard, you may be able to keep one or two.
The wildcard rule varies from State to State, but in most cases, if you refuse to part with valuable items/assets, then your bankruptcy claim is denied and you are left with your debts. If you try to give your assets away to hide them before filing, then you will be penalized and maybe even prosecuted.
If you do not have heirlooms you wish to protect, then you are typically allowed to play your wildcard for things such as:
- Some of the equity in your personal residence
- A car or motorcycle worth less than $5000
- Household goods you need to live such as bedding and clothes
- Some household appliances such as your fridge and maybe your built-in cooker
- Some of the tools or equipment you need to do your job
The dollar limit for your wildcard item(s) will depend upon the rules in your judicial district (aka your state rules). For example, in Idaho the dollar limit is around $800, whereas in Indiana the wildcard amount is closer to $9,350.
You Have To File Alone, With A Trustee Or An Attorney
You may file for bankruptcy on your own, which means you are responsible for all that paperwork and administration. Only around 9% of US citizens file for a chapter 7 petition as was stated by the New York Times in 2014.
There is a difference between bankruptcy lawyers and bankruptcy petition preparers. Petition preparers are people who make the paperwork easier to handle so that you may submit it yourself, but they are not legally allowed to give you advice. Your bankruptcy lawyer may give you advice and may do your paperwork for you, but they are more expensive.
A trustee is often appointed during or before the bankruptcy proceedings. The trustee will/should oversee the case. You may file the petition yourself or with a lawyer and then have a trustee appointed.
If you file the petition yourself, you are expected to fill out at least sixteen forms. If you are not accustomed to doing your own tax returns, then you may find these sixteen forms a little difficult. Most people do it over the internet using Electronic Filing (CM/ECF).
Advice From A Sexy Writer
It is up to you how you proceed, but if you are considering hiring a petition preparer–then please do your research beforehand. There are hundreds (maybe thousands) of online reviewers and discussions that talk about how petition preparers have done shoddy work and cases have been rejected because of it.
If you are filing your petition yourself, then take the time to learn how to file correctly. Don’t automatically go the easy route by hiring a petition preparer because you will have to find a good, reputable and highly trusted one; as I understand it, it is quite difficult to tell which are good and which are of a poor quality before buying.
How Much Does It Cost To Go Bankrupt
Let’s assume at this stage that you understand that most of your assets and money will be taken when you petition for bankruptcy, we may now explore how much it costs to get things underway. As you can imagine, the cost is going to vary from person to person and State to State, but here is roughly what you can expect to pay.
A bankruptcy lawyer/attorney is going to charge between $1000 and $1500. If you decide to opt for a petition-filing company, then they may charge around $1000, but they will not charge the extras that an attorney may charge. For example, an attorney may charge extras such as $200 for light clerical duties.
If you decide to file pro se, which means on your own, then you may avoid these costs, but you will have to fill out at least sixteen forms yourself. Using online software and websites may help you to fill out the forms, but you are responsible for their accuracy and how well they are filled out.
The amount that the U.S. Bankruptcy Court is going to charge in fees will vary depending upon the type of bankruptcy you file. Chapter 7 and chapter 13 bankruptcies are going to cost you between $335 and $400. If you have a severe financial hardship, you may pay the fees in installments. It will cost you between $235 and $300 to re-open your case if something was missed, it cost between $30 and $40 to add creditors, and it will cost between $25 and $50 to change your petition from one chapter to another.
Miscellaneous Fees You May Pay
Do not confuse your attorney fees with your court filing fees. A common miscellaneous fee is a credit counseling briefing that some people pay for in order to find out if they are eligible for bankruptcy. Many people pay for a credit report prior to filing their petition, but these days you can get a credit report for free. You can get a free credit report a trial account that you cancel before the end of the first month, or with a free credit scoring company. These days, you can get a free credit report with Quizzle, or Credit Sesame, or Credit Karma.
You may also have to have some of your assets compared with similar assets, which usually costs around $20 for comparison reports. You may have to have your assets appraised, which usually costs around $500. A comparison will usually suffice with house/apartment properties unless your house/apartment is very dissimilar to the ones surrounding it.
Conclusion – Please Think Hard Before You Create Your Petition
In this article we have discussed what bankruptcy is, what rules are followed, how it happens, possible alternatives to bankruptcy, what you should do to begin proceedings and how much it will cost. I would like to conclude by repeating what I wrote earlier, which is that you should strongly consider all other morally correct and legal options before you petition for bankruptcy.
Chapter 7 and 13 bankruptcy will stay on your credit report for a long time. Chapter 13 bankruptcies will remain on your credit rating for seven years and chapter 7 will stay on there for ten years. After those time periods have elapsed, the effect on your credit rating will linger for years.
Even if you forget the credit rating side of the argument, you will have to lose most or all of your assets and you will have to go for years without having credit, which may mean you get a mortgage later, which means you may not own your own home by the age of retirement.
It is not my place to tell you what you should or shouldn’t do, I am simply imploring you to explore all other legitimate and morally correct options before you file your petition for bankruptcy.