Think bankruptcy could be just what you need to fend off over-reaching creditors and get that fresh start? You’re right. But how to go about it? In this post we’ll outline the steps you need to take.
Step 1: When to Seek Help
The typical individual debtor has been coping with challenging financial conditions for months or even years. But then why file bankruptcy? The reason is often sudden, unexpected events that make it impossible to keep up. Examples include:
- Chronic illness
- Medical emergency
- Job loss or layoff
- Divorce or litigation
- Savings exhausted
Of course small businesses are as vulnerable as individuals. In fact, as the current jobless “recovery” drags on, more people than ever are filling the income gap by opening their own businesses. Unfortunately these freshly-minted enterprises often fail at an even higher rate than other small businesses.
Step 2: Talk to a Professional
There is more information available about bankruptcy now than ever before; some of it is even true. But to really get answers and build a successful case, find a profession in your area and talk about your financial picture – warts and all. Remember, a good lawyer will help you meet your goals without resorting to tricks or shortcuts.
Prepare for Your Meeting
There is no 1-size-fits-all list for what to bring to that first consultation with your lawyer, but it’s a good idea to include:
- Credit card bills, loan statements
- Mortgage and HELOC statements
- Auto loan statements (all cars)
- Proof of monthly living expenses
- 6-months’ proof of income
- 6-months’ bank statements
- Kelly Blue Book auto values
- Recent appraisal of your home
- Lawsuits, citations, foreclosures
- Divorce decrees, marital settlement
- Leases, mortgages, contracts
If you own a small business then, in addition to items from the above list, you should also plan to bring:
- 2 years’ tax returns
- Current balance sheet
- 1-year income statement
- List of trade creditors
- List of trade payables
- List of business loans
- List of business partners
- List of employees/payroll
- Accountant contact info
- Insurance agent contact
Make the 1st Meeting Count
I’ve met with literally thousands of debtors over the years but I’m still surprised at what people expect from that initial meeting. If you’ve gone to the trouble of compiling financial information and assembling the items listed above, why wouldn’t your lawyer to be ready too? Expect to pay the retainer then fill out and sign these critical forms before moving forward:
- Attorney Retainer Agreement
- Social Security # Verification
- Consent to Electronic Filing
- Request for Tax Transcripts
Step 3: Petition (and Plan) Preparation
Once you’ve hired your lawyer and provided the necessary documents and signatures, you’ll receive drafts of the documents to be submitted on your behalf:
- Bankruptcy Petition and Schedules (all chapters)
- Plan of Reorganization (Chapter 13 and 11 cases)
Most likely there will be at least one follow up meeting or telephone and e-mail exchange as you fill in gaps or provide necessary follow up information; and there’s always something.
Step 3 1/2: Median Income, Credit Counseling, and Debtor Education
In 2004 massive changes were made to federal bankruptcy law via the so-called Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Two in particular were clearly designed to tamp down the number of people seeking bankruptcy protection:
The kind of bankruptcy relief available was now based on how actual household income stacked up to State median income; as calculated based on statistics compiled by the Census Bureau and the IRS. Kind of scary, right?
In addition, individuals would now be required to undergo so called pre-filing Credit Counseling and post-filing Debtor Education.
Both credit counseling and debtor education can be completed on the Web or by telephone or in person, and both take about 90 minutes. Credit counseling must be taken before filing while debtor education must be taken before receiving a discharge of debts.
Step 4: Filing, Automatic Stay, and Creditors’ Meeting
Since 2003 bankruptcy filings in the Northern District of Illinois, consistent with the practice of Bankruptcy Courts around the country, have been done online. Once a case is filed, a number of things take place:
First, an Automatic Stay goes into effect so that creditors must stop contacting you whether by telephone or letter. Moreover, all repossessions, foreclosures, lawsuits, garnishments, lien filings, and other attempts to collect must cease. Creditors must even give back certain items taken shortly before your filing. If in doubt, don’t communicate with a creditor yourself: let your Attorney do that.
Second, 30 days or so after filing a Meeting of Creditors is held. Despite the ominous name however, this is primarily a chance for your Trustee to verify the details and integrity of your case. Creditors seldom turn up. In any case, you can relax: your Attorney will be with you. Besides, the environment is more that of a meeting than a courtroom.
Finally, if you filed a plan of reorganization there are a pair of additional events that take place: Confirmation and Fee Application hearings. You don’t need to be present for either of those.
Step 5: Get on with Your Life
Bankruptcy is complex, probably more complex than necessary. An experienced Bankruptcy Attorney should will help you understand the process, and maybe make it less intimidating.
Now go out there and get your fresh start!