Bankruptcy laws are administered by the U.S. Bankruptcy Court and provide relief to individuals and companies that can't pay their debts on time. Chapters 7 and 13 are the two types of bankruptcy procedures designed for individual consumers saddled with personal, family and household debts. Chapter 11 is a complex procedure usually reserved for businesses, and Chapter 12 is designed for family farmers and fishermen.
Chapter 7 bankruptcy, known as liquidation, applies to low-income, low-wealth individuals -- as determined by a means test filed with the court -- who are willing to have their nonexempt property sold to help pay off unsecured debts -- that is, debts that are not collateralized by property. Exempt property includes some of the equity in your house, car, household items, work tools, health aids and life insurance policies. After liquidating your nonexempt property, the court discharges the remainder of your unsecured debt, though you can be sued separately for payments due on exempt property. Chapter 13 bankruptcy, repayment, is meant for individuals with regular income who want to repay all or part of their debts through a court-approved repayment plan.
According to Nolo, the ordinary attorney fees for Chapter 7 bankruptcies range from $1,200 to $2,500, and those for Chapter 13 are between $2,500 and $5,500, depending on where the case is filed. Chapter 7 attorney fees are usually paid before filing, while lawyer fees for Chapter 13 are often paid through the repayment plan after filing. Court fees for Chapter 7 are $335, and those for Chapter 13 are $310. Additional clerical fees may apply. Low-income Chapter 7 applicants may petition to have the filing fees waived or to pay the fees in installments.
The U.S. Bankruptcy Court states that it is extremely difficult to succeed in bankruptcy filings other than Chapter 7 without an attorney. It further warns of serious long-term financial and legal consequences of a do-it-yourself filing, such as loss of property, as well as the technical complexities and the harm caused by mistakes or inaction. The court urges you to hire an attorney.
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You will need to perform several actions before filing for bankruptcy:
- Receive credit counseling from an approved agency up to six months before you file. Upon completion, you'll receive a certificate that you must file with your petition.
- Identify the correct district court within your state in which to file.
- Check the court's website for specific local requirements.
- Identify which chapter you plan to file, and take the means test if you plan to file Chapter 7.
The Bankruptcy Process
These are the steps you'll follow to file for bankruptcy:
- File your petition (Official Form 101), accompanied by several other forms and documents, with the court clerk along with your filing fee (or application for waiver or for installment payments), names and addresses of all creditors, credit counseling certificate, and other forms requested by the court.
- Upon filing, an automatic stay goes into effect, preventing your creditors from taking any further actions against you.
- Within 14 days, file additional required forms and schedules that list your assets, liabilities, property, contracts, leases, income, expenses and other information. Also include pay stubs received within the last two months, your means test calculation and -- if filing Chapter 13 -- your disposable income disclosure and repayment plan.
- The court will appoint a bankruptcy trustee, who will hold a creditors meeting between 21 and 40 days after filing. At the meeting, you will be put under oath and be asked questions by the trustee and creditors. If filing Chapter 13, the trustee will guide the formation of a repayment plan.
- You may convert a Chapter 7 case to another chapter, but you can only do this once.
- Under Chapter 7, the trustee will liquidate your nonexempt assets and pay off creditors to the extent possible. You may file motions or objections with the court if necessary. In virtually all cases, the court will discharge your remaining unsecured debts within 60 to 90 days of filing.
- Under Chapter 13, the creditors may object to your plan and can work out plan modifications with you. A confirmation hearing will be held within 20 to 45 days after the creditors meeting, at which time the court addresses creditors' objections and approves your repayment plan.
- You begin making payments to your trustee under the provisions of the Chapter 13 repayment plan. The trustee forwards the payments to creditors.
- The court discharges your remaining unsecured debt that was not covered by the Chapter 13 repayment plan.