While no one places “bankruptcy” at the top of their resolution list, many do place “figure out debt” at the top of that list. While there are a great many ways to figure out debt, it’s important to remember that bankruptcy is a great way to discharge debt so that you can move forward with a clean financial slate.
Resolution: File Bankruptcy
While there are many ways of dealing with debt, if you feel like you’ve exhausted them all, you might consider asking yourself if you should declare bankruptcy?
There are some options that you might want to consider, if you haven’t already yet, and a few questions to ask yourself.
Number one, are you able to reduce your debt or work out a favorable payment plan with your creditors? Many times creditors will work with people that are delinquent on their payments to help negotiate terms so that a debtor can pay their debt. Before you throw bankruptcy into the mix as a potential option, explore alternatives such as credit or financial counseling, negotiating with creditors, credit card consolidation, loan modification, and loan refinancing.
The following indicate a good time for when to seriously consider declaring bankruptcy:
- You’ve been out of work for an extended period of time and you have no unemployment income or savings
- You are delinquent on your taxes
- Your home is nearing foreclosure
- Your wages are being garnished
- You are facing lawsuits for delinquent bills
The decision to declare bankruptcy is different for everyone. Speaking with a professional about your particular situation can help you evaluate your options.
Types of Bankruptcy for Individuals
If you do decide to declare bankruptcy, you should be familiar with the most common types of bankruptcy for individuals: chapter 7 and chapter 13:
- A chapter 7 bankruptcy liquidates all non-exempt assets to pay off the debt you owe to creditors. This is typically considered the best option when you have little income and a large amount of unsecured debt. Unsecured debt includes: medical bills and credit cards.
- A chapter 13 bankruptcy reorganizes debt and establishes a repayment plan to pay debt owed to creditors. This is considered the best option for debtors that have income but are needing some breathing room to be able to catch up on outstanding debts.
Determining Form of Consumer Bankruptcy
To determine what form of bankruptcy you will file as a consumer, you will need to take the “means test.” During this test, you are required to supply information about your income. Based on that, it will be determined if you have enough money to pay back creditors through a repayment plan (n Chapter 13) or if you do not have the “means” to back creditors, and thus need to file Chapter 7.
The Means Test
The main purpose of the means test is to identify who is able to file Chapter 7. Some debtor’s incomes are too high, thus disqualifying them from being able to wipe out their debt in Chapter 7 bankruptcy. Typically, those debtors with higher incomes are required to file Chapter 13. The means test calculates whether a debtor has the “means” to pay back at least a portion of the debt that is owed to creditors.
How Means Test Works
The means test compares a debtor’s average monthly income from the six-month period prior to the bankruptcy filing against the median income of the state that the bankruptcy was filed it. The means test also takes into account the debtor’s expenses as well as the national and local standards for living expenses.
That information is then used to determine if a debtor has any disposable income (money leftover after living expenses have been factored in) that can be paid to creditors.
Sometimes, based on the amount of income a debtor receives, the means test is automatically passed with just a few simple steps. Sometimes debtors must complete the entire form before the test can determine eligibility.
Passing The Means Test
The means test is greatly dependent on the comparison between a debtor’s income and the state’s median income level. A debtor will be required to compare his or her income to the state’s median income for a household of the same size as the debtor’s. That means if a debtor has a family of four, the debtor will need to compare to the median income for a family of four in the state they are filing.
Not Passing the Means Test
Just because a debtor does not pass the means test, that does not bar them from filing for bankruptcy. Chances are a debtor will be able to file Chapter 13 bankruptcy, which means he or she will most likely still be required to pay back a portion of funds to creditors.
For more information on if you should file for Chapter 7 or Chapter 13, it’s advised that you work with a bankruptcy attorney.
Chapter 7 Process
Filing for Chapter 7 bankruptcy can feel overwhelming, but the process is actually fairly straight-forward. As always, it’s advised that you work with a bankruptcy attorney to help guide you through the process.
From start to finish the entire Chapter 7 bankruptcy process takes from four to six months, and rarely do cases go to court. It should be noted that the process does require just one mandatory non-court appearance before the trustee. At the end of the process, debtors are able to discharge most or all of their debt.
Steps of a typical Chapter 7
1. Pre-bankruptcy credit counseling. For a person to be able to file Chapter 7 bankruptcy, they must first receive credit counseling from an approved agency. This needs to happen within the six months prior to filing.
2. Bankruptcy petition. Filing consists filing out some paperwork, including the bankruptcy petition, a schedule that details your financial information, and other forms that are there to help you calculate your income, expenses, and what can be considered exempt. This is where it is helpful to involve a bankruptcy attorney that can explain what needs to be included on these forms.
3. Automatic stay. When a debtor files a bankruptcy petition, an automatic stay goes into effect. This automatic stay prohibits creditors from continuing to collect from a debtor.
4. Assignment of a bankruptcy trustee. A court will assign a bankruptcy trustee to administer the case. This assigned trustee will attempt to maximize assets included in the bankruptcy estate so that the sales of the assets can be distributed to unsecured creditors. The trustee also reviews all the paperwork to check for inaccuracies and any possible fraud.
5. Meeting of creditors. Next, a debtor is required to attend a meeting of creditors hearing that is administered by the bankruptcy trustee. This is not a court hearing, but rather a meeting where a trustee will ask a debtor about his or her petition and finances. Creditors are allowed to appear, although most do not, and are also able to ask questions of the debtor.
6. Decision on Eligibility for Chapter 7. A court will next decide if the debtor is eligible for Chapter 7. A bankruptcy attorney will be able to assess this. One reason a court might deny eligibility of a debtor is because of the results of a means test that evaluates debts owed and income earned.
7. Decision on property. If property is exempt, a debtor keep it. If there is nonexempt property, the trustee decides next steps. One option is that it is seized and sold to repay creditors. There are a number of exemption options for property, and you’ll want to consult a bankruptcy attorney to review what assets you might be able to exempt in your filing.
8. Determination on Secured debts. Secured are debts that have property that can be used as collateral associated with them. You can often surrender the secured debt to reaffirm the loan or do nothing. Doing nothing means you will need to keep paying back the debt owed.
9. Financial management course. Before a debtor can receive a discharge, he or she must take a debtor’s education course.
10. Discharge. Between three and six months after a debtor file for bankruptcy, the court grants a bankruptcy discharge. At this point, the automatic stay is lifted.
11. Bankruptcy case closed. Once a discharge has been granted, a court closes the case. This usually happens a few days or weeks following the granting of the discharge.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix business bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008