Filing for Bankruptcy? A Step-by-Step Guide

If you are planning on filing for bankruptcy, there are a number of steps that you will need to complete. If you successfully complete the process, you will be able to take control of your debt situation or completely eliminate it. Here are the basics of how to file for bankruptcy.


The first thing that you will need to do is choose which type of bankruptcy that you plan on filing for. There are 2 main types of bankruptcy that most people use. These types are Chapter 7 and Chapter 13. Chapter 7 is known as the liquidation bankruptcy. With this type of bankruptcy, you will be able to discharge your debt so that you do not have to pay it any longer. With Chapter 13, you will be going through a reorganization and coming up with a plan to repay your debt.

Chapter 7 is the most sought after form of bankruptcy because it eliminates your debt. However, not everyone is eligible for it. You have to meet income requirements or pass a discretionary income test in order to qualify for Chapter 7. If you do not qualify for Chapter 7, you can file for Chapter 13 in most cases.

Hire a Lawyer

Although you could potentially file for bankruptcy on your own, hiring a lawyer will usually be the best decision. They can provide you with experience in the matter that you are lacking. They will help you fill out the necessary paperwork, meet the deadlines, and walk you through the entire process. They can also be beneficial when trying to decide which type of bankruptcy to file. You want to hire an attorney that specializes in bankruptcies instead of some other type of attorney for this process.

Documents

Once you have hired legal representation, you will need to go to the courthouse and get the appropriate documents. You will have to fill out a petition that says you are filing for bankruptcy. You will also have to gather your financial documents together that detail every aspect of your life. You will have to show how much income you make, how much debt you have, and what you have in the way of assets. You will have to detail all of this information on the appropriate bankruptcy forms with your court system.

Credit Counseling

Most states will require you to complete credit counseling before you are eligible to move forward with your bankruptcy. This will have to be done with a certified credit counseling agency. You will have to provide proof to the court system that you attended the counseling session.

Bankruptcy Trustee

With both types of bankruptcy you will have to work with a trustee. With Chapter 7, they will determine what assets you have and liquidate some of them to repay your creditors. With Chapter 13, the trustee will oversee your repayment plan.

Discharge

If you are using Chapter 7, the judge will then discharge your debt. This means that you no longer owe the debt that was discharged and creditors cannot attempt to collect it from you any longer.

Why Credit Cards Can Be So Devastating

We are a society that runs largely on plastic. It’s easy. It’s convenient. And we don’t really have to watch the money leave our hands. And, if we are using credit cards, the money being used may not even be ours. Credit cards, when used irresponsibly, can have devastating effects on your finances:


Out of Sight, Out of Mind

One of the biggest issues is a mental issue. When using credit cards, it is easy to rack up the balances because you don’t actually see the money going anywhere. It’s really easy to spend a great deal in a short amount of time because you’re not pulling a dwindling pile of cash out of your pocket. Without really paying attention to what you are doing, you might find yourself spending more than you thought you would. (Indeed, studies show that those who use credit cards spend more on an average shopping trip than those who use cash.)

The fix: Pay attention to your spending. Just as your track money coming out of your checking account, you should track your credit card spending. Personal finance software can help you keep track, and financial applications on your smart phone can keep you up-to-the-minute. Consider what you spend on your credit cards as coming out of your checking account, and prepare to pay the balance of each month.

Carrying a Balance = High Interest Charges

Credit cards are so devastating because of their interest rates. When you pay interest, you are paying money directly into someone else’s pocket — all for the privilege of borrowing money. While credit card interest rates aren’t the highest out there (they are lower than pay day loan rates), they are still quite high. And, when interest is compounded daily, it means that every day that you have a balance means that you are charged a little more interest. That interest is added to your overall balance, and then interest is charged on your accrued interest as well as the principal. Soon, things get out of hand, and you find you have paid more in interest than you even borrowed in the first place.

The fix: Pay down your debt as soon as possible. Start with the highest interest credit card first, and put what you can toward paying that card down. If you use your credit card in the future (for rewards programs), make sure that you only spend what is in your budget. Pay off your card balance each month so that you aren’t charged interest.

Small Minimum Payments

It may seem like a great deal. You charge a large purchase on your credit card, and then you only have to pay around $25 a month for it. Score! Unfortunately, if you only pay the minimum payment, you could be paying that purchase off for the next 10 years; chances are that item will be long gone by the time you pay it off. On top of that, when you pay only the minimum payment, most of your payment actually goes toward your monthly interest charges. So the balance is reduced at a snail’s pace. By the time you pay off the card, making only minimum payments, you will have repaid three or four times the amount you originally borrowed.

The fix: Always pay more than the minimum payment. Pay off the entire balance each month if you can. It’s best if you just save up to buy large items, making sure that you can pay off the purchase right after you make it. If you decide you have to have it now, reconsider. If you can’t pay off an item in two months, you really probably can’t afford it.

The Debt Cycle

The combination of easy spending, high interest rates and low minimum payments makes credit cards so devastating to finances. It promotes a cycle of debt in which you spend years buying a few things on credit, carrying balances and paying them down slowly. Indeed, this combination is exactly what credit card issuers want: An army of consumers that are able to continue to make payments (comprised mostly of interest charges) without actually completely succumbing. It’s about encouraging consumers to live on the edge.

If you want to break the debt cycle, you have to get back to financial basics:

■Spend less than you earn.

■Create a spending plan or budget and stick to it.

■Say “no” to consumer items you can’t actually afford.

■Pay down debt.

■Save for the future.

Work toward moving beyond the debt cycle, and you will find that credit cards lose their power to devastate you financially.

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Bankruptcy Stats Take Center Stage in Health Care Reform Debate

Statistics have long told us that a significant percentage of personal bankruptcy filings in the United States stemmed from medical problems. A 2001 study indicated that medical problems were a contributing factor in at least 46.2% of personal bankruptcies. By 2007 that number had climbed to 62.1%, and a separate study estimated about 70% in 2008.
The importance and validity of those figures has been hotly debated, but at last week's White House health care summit a significant fact bubbled to the surface: about 80% of those whose bankruptcy filings were triggered by medical bills actually had health insurance coverage. That news--which isn't really news at all but hasn't been the focus of much coverage in the past--shifts the scope of the problem somewhat.
The approximately 47 million uninsured Americans have been mentioned liberally, but this statistic tells us that those without insurance are not the only people adversely affected by our current health care system. In fact, many of those who believe the current system is working well for them may believe that only because they haven't faced the kind of catastrophic illness or injury that has forced their fellow insured Americans into bankruptcy.
Whatever the solution to America's health care crisis might be, this data is key to understanding the extent of the challenge.
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Chapter 13

Background
A chapter 13 bankruptcy is also called a wage earners plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period "for cause." (1) If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids creditors from starting or continuing collection efforts.

Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on "consumer debts." This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.

Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $360,475 and secured debts are less than $1,081,400. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. Id.
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.
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