Wondering What Do You Need To Do To File Bankruptcies? then we got your back covered with this detailed guide. Bankruptcy is a situation in which the extent of debts of an individual is higher than the extent of money that they have to offset, or pay the debts in a timely manner. In simple words, it can be termed as a situation in which a debtor is unable to pay his dues to his creditors. Unfortunately, due to the unpredictable financial market and jobs getting affected, a lot of people have had to undergo the unfortunate process of filing for bankruptcy in recent times. A person can either choose to file for bankruptcy as an individual, or on behalf of their business. Filing bankruptcy on behalf of your business does not necessarily mean that your assets separate from the business will be liquidated too, since the business is a distinct legal entity. However, it is likely that your business will be permanently closed for operations.
Basic concepts of Bankruptcy
Before filing for bankruptcy, either as an individual or as a business owner, it is first important to understand what it means, what it entails, and some basic concepts behind the term. Primarily, the two main focus points of a bankruptcy proceeding are the creditors and the debtor. The creditor is the person who lends the money to the individual who is unable to pay it back, or namely the debtor. A debtor can be either an individual or an artificial juristic entity, such as an organization or a company. Similarly, a creditor can also be a company, an individual, or a bank, depending on the circumstances of each case.
Types of bankruptcy
The types of bankruptcy proceedings that can be filed varies depending on which country you belong to, and what the jurisdiction of that country is. This article will focus on the types of bankruptcy proceedings that exist in the United States of India. Per the bankruptcy code, there are four primary types of bankruptcy, or “chapters”. They are Chapter 7, Chapter 13, Chapter 12, and Chapter 11 filings. While each of them deals with bankruptcy proceedings, they are slightly different from each other.
Chapter 7 bankruptcy proceedings are most commonly filed by either individuals, or by spouses together. The main process behind the recovery of debts in a chapter 7 bankruptcy proceedings is by liquifying the assets of the debtors. Liquidation of assets basically means to sell non-liquid assets to convert them into their cash value, to repay existing debts. While it may not be possible for a debtor to pay his debts fully despite liquidating his assets, to the extent or the amount to which the debt can be recovered, it will be done.
There may be classes of creditors as well, where certain creditors are entitled to full payment before the others, and depending on the class that a certain creditor belongs to, the cash realized from liquidating the assets will be given to that particular creditor in respect of the outstanding debt.
It is not always the case that a chapter 7 bankruptcy proceedings are to be filed only by an individual. It can be filed by organizations or corporations as well. Even partnership firms are qualified to file Chapter 7 bankruptcy. Usually, a business chooses to file for bankruptcy because they are unable to fulfil their debt obligations and want to start over with a clean slate. While businesses may want to continue their work even post-filing for bankruptcy, most of the time, filing for bankruptcy means that the business will no longer be able to continue their operations. It must be kept in mind that while there may arise a source of income post the bankruptcy proceedings, such income will not be considered as a part of the bankruptcy process.
Another type of bankruptcy filing is under chapter 13. Chapter 13 is similar to Chapter 11. It is the role of the debtor in such a bankruptcy process to repay the debt that he has taken onto himself. In this type of bankruptcy process, the assets of the debtor are not garnished or liquidated to repay debts. However, a specific period of time or a set time frame is demarcated within which the debts have to be repaid, and the usual period granted to most debtors is a period of five years. In this type of bankruptcy, rising income during the course of the bankruptcy process can be used to offset debts to some extent.
Chapter 11 and Chapter 12
Apart from Chapter 7 and Chapter 13 bankruptcy proceedings that people hear about commonly, one can file for bankruptcy under chapter 11 and chapter 12 of the bankruptcy code as well. Here is a glimpse of what chapter 11 and chapter 12 bankruptcy proceedings entail.
1. Chapter 11
For those businesses in the United States of America that are undergoing a reorganization process, and that are unable to pay off their debtors due to their financial state, this is perhaps the most ideal chapter to file for bankruptcy under. It is a boon for businesses that are in financial trouble. Despite it being a helpful process overall, and while its goal is to provide the creditor with the sums that he is entitled to and to help the debtor escape from the clutches of debt, filing a chapter 11 bankruptcy can be a fairly complicated process. An individual can also file for bankruptcy under Chapter 11. If a business is going under a chapter 11 process, while the owner of the business retains ownership over the business, he has to work to repay the debts of the creditors.
2. Chapter 12
Chapter 12 is exclusively applicable only to farm owner debtors who still retain control over all of their assets. Based on a repayment system (usually in the form of an instalment schedule), the debtor has to work and attempt to repay the creditors in full. Chapter 12 bankruptcy filings are not as common as the rest, because of the narrow criterion of people (farm owners and fisheries) that can file under chapter 12.
What Do You Need To Do To File Bankruptcies?
If you find yourself being unable to repay your creditors and being unable to find enough money to pay your debts back, then it may be ideal to file for bankruptcy, either as an individual, or on the behest of your business. However, before doing so, it is important to understand what exactly the process entails and how you can do so without any hitches. Here are some of the things that you could do to ensure that the process goes smoothly.
Examine your financial status
One of the first and most important things that you will need to do if you are planning to file for bankruptcy is to check your financial status, and check how much liquid cash you have, what your assets are, and what the extent of your liabilities are too. Try and glean as much information about your financial status as possible, and attempt to eradicate any loopholes that the creditors may take advantage of. If you are married, try and figure out how you are going to navigate joint savings and other debts. It is also important to check as to whether your spouse will separately have to file for bankruptcy as well. Here are some of the things that you should ideally examine:
- Debts: Ensure that you check how much existing debt you have, what payments you have to make, what the rate of interest is, and aspects such as these. Furthermore, ensure that you record who the creditor (or creditors) in question is, and compare that against the finances that you have now to ensure that you can repay the debt amounts.
- Income: Another important aspect that you must have information on, that can help you navigate your bankruptcy process without trouble is the status of your income. Ensure that you are able to track and provide information about your income for a period of at least 6 months, and possibly future income as well, if it is something that you can do. Include all your sources of income, such as from your regular jobs, from part-time jobs, side jobs, and businesses. In some cases, if you share finances, the incomes of your family members can also be considered your income.
- Assets and property: One of the first things that happen in a bankruptcy process if the debtor does not have enough liquid cash (depending on which type of bankruptcy proceedings have been filed) is for the assets to be liquidated to repay debts. Assets include not just immovable property such as your home or estate, but also furniture, cars, saving accounts, and even livestock. Stocks and shares, bonds, etc. are also considered assets. You can seek a waiver on certain personal possessions, such as items with sentimental value, etc. Exemptions usually vary depending on jurisdictions. If you wish to seek exemptions, it may be helpful for you to hire the representation of a lawyer, who can help you navigate the bankruptcy process in an easier and simpler manner.
Ensure that you consider your living costs
Everyone spends a certain amount of money for their upkeep and the upkeep of their families. This includes costs such as rent, food, clothing, transport, medical care, child care expenses, etc. Ensure that you factor in these expenses while calculating your finances and filing for bankruptcy to avoid a situation where you are unable to afford or pay for the requisite essentials that you need.
Credit counselling is an important and helpful step that you can take to improve your chances of getting your petition accepted. Credit counselling basically entails counselling or education about how to manage your finances and credit better, and how one can keep their credit score positive. Depending on your preferences, there are a number of agencies that provide credit counselling services and educate you on how to manage your credit, and how to work with your previous credit history. For instance, some credit counselling agencies even provide credit counselling online or over the telephone. While a lot of people find credit counselling futile or annoying, it can also be an extremely helpful method to understand as to how to deal with poor credit better and how to manage your finances more effectively for the future.
Depending on which credit counselling agency that you opt for, some may even help you prepare the requisite documents that you will need for filing bankruptcy. They also have information on which sort of bankruptcy may be most ideal for you. For instance, if you plan to go for a chapter 13 bankruptcy, a credit counselling agency can even help with aspects such as figuring our your payment schedule. This becomes important because your payment schedule is likely to begin as early as 30 days (a month) from when you file your bankruptcy petition.
Meeting your creditors
Once you file your bankruptcy petition and once it gets accepted, the creditor generally receives a notice with all the facts that you have represented in your petition. This also includes a stay order to prevent the creditor from taking action against you for not fulfilling your debt obligations. Once about three (to six) weeks have lapsed from when you first filed your petition, the bankruptcy trustee is likely to schedule a meeting with your creditors. This meeting is sometimes referred to as a 341 meeting. In this meeting, the creditor usually asks you the questions that they have for you, or sends you their questions through a representative. If you are married, it may be mandatory for not just you to attend the meeting, but also for your spouse to attend it as well.
The answers that you give to the questions must be true factually, and honest. It is likely that during this meeting, the consequences of declaring bankruptcy will be presented to you, and you will have to reaffirm that you will pay the debt back, per the schedule that has been decided.
Bankruptcy is filed because a debtor is unable to pay his or her debts fully within the initially stipulated time frame. Bankruptcy basically gives a new lease of life to the debtor and enables him to be able to fulfil his debt obligations while ensuring that the creditor gets the money that he is entitled to receive. This is why when a bankruptcy application is accepted, an automatic stay is placed on the creditors to prevent them from taking legal action against the debtor for non-fulfilment of debt obligations. They cannot garnish your assets or seize your properties, or sue you in court during the period of the stay. In a chapter 13 bankruptcy process, the stay order applies to enforcement against guarantors and co-mortgagors as well.
When the meeting is going to end
Post the completion of the meeting, the creditors may request further information or recheck the plan of payment. In case the creditors have any objections to the determined plan or any other types of objections, they are required to file their objections in writing within 90 days from the date of the meeting. Once such an objection is resolved, the petition is then taken ahead.
In a chapter 7 bankruptcy: In a chapter 7 bankruptcy, assets are usually liquidated as a first step. Once this is done, with the value of money that has been realized from the sale of your assets, the creditors are paid. Once your debts have been completely paid or wiped off, the judge of the bankruptcy court is likely to issue an order to the creditors and to you indicating that you have completed your debt obligations. Post this, creditors will not be able to take any further action against you.
In a chapter 13 bankruptcy: In a chapter 13 bankruptcy process, if the creditors do not have any objections that need to be resolved, a payment plan will be approved at a confirmation hearing. Usually, the hearing is held within 45 days of the meeting with the creditors. Per the plan of repayment (such as whether monthly, biweekly, etc.) you will be required to pay your debts on an instalment basis to the creditors. If there are any pending amounts that you cannot pay, a discharge letter is likely to be issued by the bankruptcy judge.
To finally complete the entire bankruptcy process, post-bankruptcy counselling is of immense importance. In fact, until you complete post-bankruptcy counselling, your bankruptcy process is not considered to have come to an end, and your debts will not be deemed to have been discharged. This is therefore an important final step to ensure that you complete the bankruptcy process successfully.
File bankruptcy alone or with the assistance of a bankruptcy lawyer
While going into debt might occur without you having even given it a second thought, filing for bankruptcy is a complex issue and something one who does not have experience with the law might struggle with. It is therefore highly advantageous to hire a lawyer for this purpose. Given the number of steps that the entire process entails and the intricacies of the law involved, it is tremendously helpful to hire legal representation. Any misstep in filing or during the process may result in your petition not being accepted. Given that the specific area of expertise of a bankruptcy lawyer is to handle cases such as these, it makes sense to hire one.
Most bankruptcy lawyers charge anywhere between $1000 to $2500, depending on your case and their fees. However, it is important to remember that most do not accept credit card-based payments, and it is therefore important to remember to retain enough cash to pay for their services.
Bankruptcy lawyers can make the entire process of filing for bankruptcy tremendously more easy. Not only are they aware of the law, but they also know how to present the facts of your case in a manner that fits in with the law seamlessly. However, if you are of the belief that you know bankruptcy law sufficiently and can handle the case yourself, you could do that too, since it is mostly an administrative procedure that does not involve any contentious legal issues. If you choose to undertake the process yourself, it will cost you just about $300 to $500, based on which state you reside in, or what the applicable jurisdiction for your petition is.
Low-income bankruptcy lawyers
People who are filing for bankruptcy are struggling with their financial situation and may not have the means to be able to afford an expensive lawyer. For those people who want to hire a lawyer but are not sure whether or not they can afford it, an ideal choice would be to hire a low income bankruptcy lawyer. There are many such lawyers in every location, and with the right kind of research, one can find an attorney that fits their needs and requirements.
Additional considerations while filing for bankruptcy
Apart from the points discussed above, there are certain additional points to consider while declaring bankruptcy and filing for it.
Some hitches in the process
It must be remembered that it is not always a given that your petition will be accepted. Your creditors may have objections to your filing, and a mistake in the information that you have provided can also cause your bankruptcy petition to get stuck or rejected. Here are some of the factors that might adversely affect your bankruptcy filings:
- If you are hiding information pertaining to your financial status, and the court has evidence of the same.
- If you are unable to provide the requisite tax documentation.
- If you do not submit the requisite documents within the expected time frame or do not attend the meetings that are set up.
- If you treat the matter with superficiality and you hide necessary and important documentation.
- When you fail to answer the questions of the creditors.
- When you fail to partake in credit counselling.
- When you violate orders of the bankruptcy court and/or the orders of the bankruptcy judge and/or the bankruptcy trustee.
Bankruptcy and your spouse
You can either file bankruptcy together with your spouse or separately. Filing it together helps you reduce costs but may not always be the most prudent course of action. It may affect the ability of each of you to get a good plan and showing assets can also be a more complicated process if the filing is combined.
It is not ideal to find yourself in a situation where you need to file for bankruptcy. However, if done right, it can give you a new lease of life and a clean slate to start over on. You can either file for bankruptcy with the assistance of an attorney, or by yourself. Ensure that you full the process procedurally as well as possible to ensure your application gets accepted.