What Happens When You Claim Bankruptcy?

What Happens When You Claim Bankruptcy

Making the decision to claim bankruptcy is tough – but sometimes there’s no other choice but to be honest about your financial status. Note that claiming bankruptcy is often a last resort and should only be decided upon when you’ve tried all the other possibilities. Once you’ve made that decision however, the question is: what happens next? The good news is that there are numerous websites providing step-by-step help when it comes to bankruptcy. After making the claim, you should have access to various procedural tips to create a petition, file it, and follow through with the necessary steps to get approved. In this article, you’ll get a general view of what happens when you claim bankruptcy.

What Chapter are You Claiming?

There are several types of Bankruptcy Chapters, but the most common ones are Chapter 7 and Chapter 13.

  • Chapter 7 is a wipe out plan typically undertaken by individuals who want to sell all their assets to pay off their debts. This one is often used by individuals with low income and have very little assets to make payments;
  • Chapter 13 leans more towards reorganization. Individuals who claim this type have a decent income flow, therefore allowing them to pay off a portion of their doubts through a lengthier period of time. Essentially, this helps the debtor catch up with any late payments.

Meeting the Requisites

Prior to filing, it’s important that you first meet the requisites of the Chapter you wish to fall under. Also note that a Credit Counseling is now mandatory for anyone who claims bankruptcy. This takes 6 months to complete and paid for separately. That being said, following are the other requisites when claiming bankruptcy:

  • First, your currently monthly income must be determined and compared with the median income for families in your given area. An income that falls under the median automatically makes you eligible for a Chapter 7 Bankruptcy.
  • If your income for the last 6 months falls above the median income, a Means Test is done to determine eligibility.
  • If it is determined that you have sufficient disposable income, you might be eligible for a Chapter 13 Bankruptcy.
  • If you’ve been granted a discharge in the last 8 years for a Chapter 7 Bankruptcy, you are not allowed to file another one. For Chapter 13, the count only goes as far back as 6 years.
  • No previous Bankruptcy petition must have been filed within the last 180 days.
  • Any dealings with the intention of defrauding creditors will be seen badly by court and the petition dismissed.

Exempt Properties

The law isn’t entirely unreasonable. Chapter 7 and 13 Bankruptcies typically list Exempt Properties which allows debtors to keep assets for their daily life. Here are some of the properties that fall under this list:

  • Vehicles falling within a specific value;
  • Pension;
  • Jewelry within a specific amount;
  • Reasonable amount of household property, furnishings, and clothing;
  • Pensions;
  • Household appliances;
  • Portion of earned but unpaid wages;
  • Damages paid from personal injury;
  • Portion of equity in the home;
  • Tools of the trade of the debtor up to a certain amount;
  • Public benefits.

Filling and Filing Forms

The most tedious process of claiming bankruptcy is the filling and filing of forms. You’ll be asked to fill in dozens of documents testifying to your current financial standing. The courts will require that you submit financial statements as far as one year prior to the petition. In some cases, the requirements may include as far back as 10 years.

The submission of the form will help the courts ascertain whether your bankruptcy petition is legitimate and should be awarded. At the same time, it lets them determine if any fraud is made in the filing of the petition.

Today, you’ll find websites where such forms can be downloaded, filled in, and sent back all through the Internet. Note though that this may not be 100% accurate – hence the need for a bankruptcy lawyer to direct you in the process.

After Filing

A temporary stay is often granted once you’ve filed the documents. This essentially means that creditors are temporarily prevented from contacting or coaxing you into paying off debts to them. Several other things may occur. The court may require a meeting between you and creditors to iron out payment schedules or to confirm payment schedules. Chapter 7 claimants are typically summoned to just one meeting after deliberations are made as to the validity of their claim. After such deliberations, if a bankruptcy is approved, the assets are sold and debts paid off accordingly. Any leftover debts are cancelled as per the bankruptcy agreement.

Payments for Filing Bankruptcy

Be prepared to spend as much as $350 for a bankruptcy petition. This is the amount paid to the courts and may vary, depending on your city and state. The payment may be waived upon approval of the court. In some cases, you might still need to pay the fee but in separate payments.

Debts You Can’t Discharge

Understand that there’s a hierarchy to how debts are paid when filing for bankruptcy. Some debts are paid off first with the courts requiring that they be paid in FULL. Here’s what you should know about debts that can’t be discharged or those that take first priority during payment:

  • Taxes and tax liens – these ones must be paid in full and take priority in payment;
  • Student loans cannot be discharged and if not paid in full, will follow the debtor even after bankruptcy petition is granted;
  • Child support and alimony are considered priority debts;
  • Any debts concerning fines and penalties payable to government agencies;
  • Any unscheduled debts;
  • Any debts resulting from judgments over wrongful debt: example, debts due to drunk driving injuries to persons;
  • Cooperative association fees;
  • Any debts that were obtained after filing for bankruptcy and therefore not included in your payment plan;
  • Debts resulting from fraud or misrepresentation.

Your Credit Standing

This is perhaps the biggest impact of filing for bankruptcy – your credit standing will be severely limited. Once you claim bankruptcy, your creditor history will show this move and will not disappear until after 10 years. Applications for loans, insurance, and such will be subjected to higher payments. For most people however, their credit history is the last concern, especially since it is already shot after late payments over the last periods.