Despite what many experts predicted, as of August 2020, the number of people declaring personal bankruptcy actually stayed 20–30% below the previous year’s levels for Chapter 7 filings and 55–65% lower for Chapter 13 filings. This is surprising considering that the U.S. is experiencing unemployment levels unseen since the Great Depression. This isn’t your typical recession. Multiple stimulus packages have likely helped the unemployed stave off bankruptcy. So have other policies, like local and state governments halting foreclosures and evictions. But Americans aren’t out of the woods yet. It’s important to know exactly what happens when you declare personal bankruptcy.
What is Bankruptcy?
While bankruptcy looks different for a corporation versus a small business versus an individual, bankruptcy—in a nutshell—is a process in which debtors who are having trouble paying their debts can get a fresh start. Persons involved in a bankruptcy case are:
- The debtor, or the person who owes money;
- The creditors, or the persons who lent the debtor money; and
- The trustee, whose role is to liquidate any assets for payments to creditors (in a Chapter 7 case) or get creditors paid through a plan (in a Chapter 13 case) and to protect the integrity of the bankruptcy system. .
Debtors must always file bankruptcy federally in the U.S. Bankruptcy Court, but state law often defines bankruptcy exemptions. There are six types of bankruptcy, distinguished as chapters 7, 9, 11, 12, 13, and 15. Title 11 of the United States Code houses these designations. We’ll be discussing Chapter 7 and Chapter 13 when it comes to personal bankruptcy.
Steps to Declare Personal Bankruptcy
Seek qualified legal advice.
If you are considering filing bankruptcy or are planning to, the best thing you can do is obtain legal counsel. Though it is possible to file without a lawyer, debtors should use a lawyer because filing bankruptcy can have long-term financial and legal ramifications. Mistakes in the process or a misunderstanding of the law can impact your rights and obligations. And the law prohibits court employees and bankruptcy judges from offering legal advice. A lawyer can help you navigate the sometimes-rocky landscape of filing bankruptcy.
2. Determine what chapter to file under.
After deciding that you need to file bankruptcy, you and your lawyer can determine what chapter of bankruptcy to file under. As mentioned earlier, if you’re declaring personal bankruptcy you will typically file under chapters 7 or 13. This decision depends primarily, but not exclusively, on several considerations, including how much debt you have, your income, and whether you have an asset that you owe money on but want to try to protect.
In a chapter 7 bankruptcy, the trustee collects and then sells a debtor’s nonexempt assets and uses the resulting proceeds to pay off creditors. Some of a debtor’s property may be subject to liens or mortgages that still have to be paid or the property surrendered.
Chapter 13 allows for an adjustment of the debt for an individual with a regular income. This way, the debtor can pay the debt over time, usually three to five years, depending on the debtor’s eligibility. The debtor and his/her lawyer construct a plan for repayment. The debtor makes payments to the trustee, who then distributes the funds to the creditors. This is ideal for a debtor who wants to protect any assets that they owe on, like a home or car. When the debtor makes all the payments required, any debt remaining at the end of that designated period is discharged. If the debtor’s income is above a certain median, they must file a chapter 13.
3. Turn in financial information.
Before filing, you must provide your lawyer with your financial documents and information. This includes items like a list of debts and corresponding creditors, assets, income, tax returns, and bank account information. Your lawyer will give you paperwork to complete to assist you in this process.
4. Chapter 13: create a plan.
Chapter 13 requires that you, with the counsel of your lawyer, create a plan on how to pay back creditors over a three-to-five-year period. Your plan is based on the information provided in the previous step. This plan must pass a series of tests for the bankruptcy court to confirm it. The trustee or a creditor may object to the plan if they think it fails to pass any of the tests.
5. Your lawyer fills out the paperwork on their end, and files your bankruptcy case.
6. There is a meeting of creditors.
“341 meeting,” is a gathering of the debtor, creditors, and trustee. In this meeting, the trustee asks you questions about your income, debt, assets, and other elements of your financial situation. The trustee asks these questions for two reasons: to determine if there are any assets they can use to pay back creditors and to protect the integrity of the bankruptcy system. In a chapter 13 case, the trustee will also ask questions to determine whether and to what extent you’re able to pay back creditors.
7. Case discharged!
If you’re filing a chapter 7 bankruptcy, the trustee will take possession of your nonexempt assets and sell them to pay creditors. The time for this depends on the assets. But so long as all goes the way it should, your outstanding debt is discharged. This occurs usually within 90 days after the 341 meeting. But this debt forgiveness does not include certain debts, like taxes or student loans.
In chapter 13, you will make payments over the allotted time period of three-to-five years. Most, but not all, debt still outstanding at the end of that period is discharged.
Other Details to Consider to Declare Personal Bankruptcy
Bankruptcy Code is a federal statute and although the Code has exemptions, state’s outline most exemptions. There is a specific section in the Indiana Code that details how much you’re entitled to in exemptions for different assets. And in Indiana, the most common assets for a trustee to liquidate are tax refunds and real estate, but these are not the only ones.
Remember, while these are two of the most common types of personal bankruptcy to declare under, always speak with an attorney to determine the best course of action for you.