While it's commonly advertised as a last resort for consumers and business owners who simply can't remain current on their debts any longer, bankruptcy is a surprisingly popular form of debt relief. If you've decided that a bankruptcy filing is the best way to preserve your financial dignity and stop a bad situation from becoming worse, avail yourself of this step-by-step guide to U.S. bankruptcy proceedings.
Reviewing the Types of Consumer Bankruptcy
Most American consumers have two bankruptcy options at their disposal: Chapter 7 and Chapter 13. Since it involves the complete liquidation of filers' assets and the discharge of the bulk of their debts, Chapter 7 is also known as "liquidation." This process typically involves the discharge of unsecured debts like credit card bills and the simultaneous liquidation of "non-exempt" assets to fund the repayment of secured debts like mortgages. It's useful for borrowers who have little realistic hope of repaying their debts.
Chapter 13 "reorganization" plans give borrowers a bit more leeway during the bankruptcy process. Most Chapter 13 plans allow individuals to make partial or full unsecured debt repayments on elongated timetables. Whereas Chapter 7 arrangements generally involve foreclosure, Chapter 13 plans give homeowners the option of "reaffirming" their mortgages and remaining in their homes.
Filing and Documentation
In either case, bankruptcy filers must begin by formally declaring bankruptcy and properly documenting the specifics of their cases. This typically involves preliminary consultations with licensed bankruptcy attorneys. Once they've made a decision about whether to file Chapter 7 or 13, filers receive a number of disclosures that outline the remaining steps of the process. Their attorneys typically make a formal court filing on their behalves.
Financial Management Courses
Most states require bankruptcy filers to complete at least one financial management course before the discharge or liquidation of their debts. These courses can generally be taken through approved credit counseling organizations. Before the case can proceed, filers must produce certificates of completion for all required courses.
Most filers don't realize that the bulk of the bankruptcy process occurs in informal or administrative settings. In fact, the so-called 341(a) hearing is the only required meeting between filers, judges and creditors. At each 341(a) hearing, a bankruptcy judge mediates a conversation between the filer and his or her creditors. Covered topics include the filer's outstanding and "hidden" debts as well as his or her ability to adhere to the terms of an agreed-upon repayment plan. Ultimately, each 341(a) meeting produces a workable repayment or liquidation plan to which all parties must adhere.
Discharge and Repayment
Once a repayment or liquidation agreement has been reached, creditors must refrain from attempting to collect on their debts outside of the repayment framework. At the same time, the filer must follow all provisions of the agreement and make payments or disbursements in a timely fashion. Separately, the judge charged with overseeing the case must determine whether to forgive certain unsecured debts that might impede the filer's ability to satisfy senior creditors. This process is known as debt discharge. It typically can't be used to wipe away student loans, child support payments, alimony and federal tax liabilities.
Final Thoughts: See It Through
If your finances have reached a point where bankruptcy seems like the "least bad" option, you're probably feeling frustrated and isolated. Under these circumstances, your bankruptcy filing might feel like a hopeless and unsatisfying ending to a long, futile attempt to maintain your financial dignity. While this isn't the intent of the federal bankruptcy code, it's true that bankruptcy can be a confusing and often impersonal process. Accordingly, it's your responsibility to stay on top of the process and be a fervent advocate for your cause. Over the years, bankruptcy has provided millions of honest but unlucky Americans with financial "second chances." If you use it properly, it can do the same for you.