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What is involved in the bankruptcy process?
Before you can file either Chapter 7 or 13, you must pass muster under a "means test". The means test identifies those debtors who have the financial capacity to pay a significant portion of their bills to creditors. It involves comparing the debtor's income to the median income of the state where the debtor is located. If the debtor's income is higher, another set of calculations (based on ratios of debt to income) will identify whether he or she can file a Chapter 7 liquidation or Chapter 13 repayment case.
No matter where you are located, there is a bundle of paperwork requirements. A bankruptcy case begins with the filing of a petition and several forms with the bankruptcy court in your area. The forms contain lists of all your assets, debts, income, expenditures, as well as other personal background and financial information. In addition, you must file a certificate of credit counseling, tax returns (or transcripts) for the recent tax year; tax returns filed with the IRS while your bankruptcy case is open; copies of pay stubs or other proof of income received 60 days prior to filing; statement of currently monthly income and any reasonably anticipated changes in income or expenses after filing.
In a Chapter 7 (liquidation) case, the court will appoint a trustee to represent the interests of your creditors. A month or so after filing, you must attend a so-called “meeting of creditors” with the trustee to answer questions regarding your assets, debts, and so forth. Despite the name, creditors rarely attend these meetings. After the meeting, the trustee sells ("liquidates") the property that can be taken from you, takes the cash and splits it among your creditors. At the end of liquidating your property, the court schedules a final hearing and discharges your debts. The effect of this is that you no longer legally owe your creditors and they are forbidden from trying to collect any unpaid percentage.
A Chapter 13 (wage earner) case begins by filing the same papers as under a Chapter 7. In addition, you must file a workable plan for repaying your debts with the bankruptcy court, which will approve the plan. You start sending payments directly to the chapter 13 trustee shortly after filing. The trustee then pays your creditors according to the terms of the court-approved plan. When you have repaid your creditors according to the plan, a court hearing will be held and you will be discharged. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.
Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house, and because it allows the debtor to propose a "plan" to repay creditors over time – usually three to five years. Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test.
(Reviewed 11.14.08)
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