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What is bankruptcy?

Bankruptcy is a legal process that can help you get relief from the debts you cannot afford to pay. Deciding to file for bankruptcy is a very delicate decision. Thus, before you do so, you must take your time and think about the decision very carefully as it will have long lasting effects. Also, keep in mind that filling for bankruptcy will not remove all debts, since there are certain debts that cannot be discharged in bankruptcy (for example: debts from child or spousal support, most student loans, most tax debts, wages you owe to people who worked for you, damages for personal injury you caused when driving while intoxicated, debts to government agencies for fines or penalties, etc.).

The Bankruptcy Code allows debtors who are filling for bankruptcy to keep basic assets that are necessary for the debtor's “fresh start” after bankruptcy. Even though bankruptcy proceedings are governed by federal law, each state may have different "exemptions" related to the assets (property) you can keep when filling for bankruptcy.

When you file for bankruptcy protection, the federal court issues a notice of "automatic stay" that stops creditors listed in the bankruptcy petition from pursuing you for any debts until the bankruptcy court lifts the stay.

Even though there are four common kinds of bankruptcy cases, two of them are the most common ones, Chapter 7 and Chapter 13.

​The length of the bankruptcy case depends on the type of bankruptcy you file. If you file a Chapter 7 bankruptcy, your debts can be discharged in about 4 to 6 months. With a Chapter 13 bankruptcy, it can take as long as 5 years because you may still be making payments for some of the debts.

Chapter 13 is a repayment plan or a "reorganization" type of bankruptcy designed for debtors that have a regular income with enough left over to pay back at least a portion of their debts. Chapter 13 bankruptcy offers some benefits not available in Chapter 7 (you will be able to keep all of your property even though you pay back all or a portion of your debts through a repayment plan; the amount to be pay will depend on your income, your expenses, and type of debt). Chapter 13 bankruptcy is typically for debtors who don’t qualify for Chapter 7 or have non-dischargeable debts such as student loans or child support.

Chapter 7 is the most common form of bankruptcy for individuals. It is a "liquidation" type of bankruptcy, which means that the court will sell all your assets for cash and then will pay your creditors. It will wipe out most of your unsecured debts (credit cards and medical bills) which means that you will not need to pay back any balance. You will be allowed to keep all assets that are "exempt" from sale. To qualify you must meet certain income requirements. In other words, if you make too much money, you will have to file under Chapter 13. Thus, Chapter 7 bankruptcy works best for low-income debtors with little or no assets. The biggest impediment to qualify for Chapter 7 is the "means test" which was added to the Bankruptcy Code in 2005 with the intention to limit the use of Chapter 7. A first step is to determine whether your income is more or less than the median income. If your income is less than the median income for a household of your size, you qualify to file for Chapter 7 and do not need to complete the rest of the means test. If you income is more than the median, it will be necessary to determine whether you would have enough money left, after subtracting certain expenses, to repay some of your debt. It is important to mention that you cannot repeat this type of bankruptcy filing for 8 years.

​What are the steps involved in filing Chapter 7 bankruptcy?
Talk to an attorney: Before anything else talk to a bankruptcy attorney. Even though you can file bankruptcy without an attorney, which is called filing "Pro se", given the complexity and long-term financial and legal consequences, it is strongly recommended to seek the advice of a qualified attorney. "Pro se" litigants are expected to follow the rules and procedures in federal courts and should be familiar with the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the local rules of the court in which the case is filed. Making mistakes in the process or misunderstandings of the law can greatly affect your rights. Court employees and bankruptcy judges are prohibited by law from offering legal advice. Also, if you decide to file bankruptcy "Pro se", you may be offered services by non-attorney petition preparers who are only allowed to enter information into forms. Keep in mind that these "petition preparers" are prohibited by law from providing legal advice, explaining answers to legal questions, or assisting you in bankruptcy court
Credit counseling: Within 180 days previous to the day of filing the petition, you will be required to complete a pre-filing bankruptcy counseling offered through the internet or over the phone by a qualified nonprofit credit counseling.
File the Petition: You or your attorney will file the petition and related forms (schedules). Filing creates an automatic stay, meaning that creditors cannot contact you, nor garnish your wages.
The court appoints a Trustee: At this point the Trustee takes over and starts managing the process.
Creditors Meeting: The trustee will set a meeting between you, your lawyer and your creditors. You’ll have to answer questions from the trustee about your identity, your finances, and any changes since you file. If any creditor is present, you will need to respond to their questions as well. After reviewing your petition the trustee will confirm whether you’re eligible for Chapter 7.
Non-exempt property: The trustee will need to determine if any of the assets that are not exempt are worth selling. The great majority of individual Chapter 7 cases are “unsecured debt/no asset” cases in which there are no non-exempt items to be liquidated.
Education course: Before your case is discharged, you will need to complete a financial education course from a qualified non-profit credit counseling agency.
Discharge: About four to six months after filing your petition, the case will be "discharged", which means creditors can no longer try to collect on the debts, and you are no longer legally required to pay them.

What do I do next?
Send me an e-mail to get a private consultation and to continue the process of filing your bankruptcy petition.