When and How To File for Bankruptcy

Bankruptcy may sound like a last resort to avoid at all costs. However, according to Ohio bankruptcy attorney W. Mark Jump, “Clients often wait too long to see a bankruptcy lawyer and try various other ways to resolve their debt. I find that when people try to use alternatives, it really just delays the inevitable, and they probably should have filed a bankruptcy before.”

The bankruptcy process can feel intimidating or overwhelming. Still, with the professional help of a bankruptcy attorney, the process can be relatively streamlined.

Signs It Might Be Time To Consider Bankruptcy

Perhaps you’re worried about your financial situation or ability to pay bills, but you don’t know if your situation is bad enough to file for bankruptcy. You might wonder if there are other debt relief methods you could pursue.

Bankruptcy could be a good option, says Jump. “If you’re having trouble paying your bills — say you’re running 30, 60 days behind — or you’re concerned about vehicle repossession, or you’re facing numerous lawsuits, or even if none of that is happening but you have a sense that things are getting out of financial control, don’t hesitate to contact a bankruptcy attorney.”

If lenders are starting to sue you for collections, California bankruptcy attorney Michael Malter says it’s definitely time. And for some, it might be even sooner. “There are many people who can be paralyzed with stress, knowing that they have unpaid creditors,” Malter says. “They haven’t slept in weeks because they’ve been so stressed out about the debt that they owe.”

For those people, he suggests at least consulting with an experienced bankruptcy attorney to find out their options and hopefully relieve some stress. Typically, he says, the initial consultation will be free.

Common Sources of Financial Stress

Depending on your situation, financial stresses can come from a variety of sources, including:

• Mortgages
• Car loans
• Credit card debt
• Personal loan debt
• Medical bills
• Tax debts
• Old bills (utilities, phone, rent)

Some debts, such as mortgages, are secured. This means the debt is connected to a particular asset that a creditor can seize if a debtor defaults on payments. In other words, the asset is collateral for the debt.

Unsecured debt, such as credit card debt, is not backed by a particular piece of property. Since creditors don’t have collateral to seize, unsecured loans often have higher interest rates than secured debt.

Some types of debt cannot be discharged in a bankruptcy case. “As a matter of federal law, both private student loans and federal student loans are generally non-dischargeable in a bankruptcy proceeding. That’s unless there’s an extreme set of circumstances where you can demonstrate what’s called an undue hardship. But that’s very difficult. So, generally, student loans will survive any type of bankruptcy proceeding,” says Jump. The same is true, he adds, of alimony and child support.

You Don’t Have To Decide on Bankruptcy Alone — A Lawyer Can Help

Whatever the type of debt, it’s essential to realize you don’t have to decide about filing bankruptcy before meeting a lawyer. Instead, meeting with a lawyer can help you make a good decision about filing for bankruptcy. And it’s often better to start this process sooner rather than later.

“I think you can understand the bankruptcy option better by initiating the communication with a lawyer earlier so you can understand how it compares with other options,” says Jump.

Chapter 7 vs. Chapter 13: Which Is Right for You?

“Bankruptcy is a way for individuals, small businesses, and other businesses to legally resolve their debts and eliminate some of their debts through one of the chapters of the Bankruptcy Code,” says Jump.

Of the various sections of the U.S. Bankruptcy Code, “The most common for consumers are Chapter 7 bankruptcy (referred to as liquidation bankruptcy) and Chapter 13 bankruptcy, which essentially allows people and small businesses to reorganize their debts and pay many times less than what they owe on their debts over a three-to-five-year repayment plan.”

Chapter 7 Bankruptcy

When you file Chapter 7 bankruptcy, almost all debt is wiped out, no payments are owed, and the process can be over in about four months.

Certain assets can be protected in bankruptcy proceedings under state exemptions. Common exemptions include your house and car.

Chapter 13 Bankruptcy

If you have more assets than the amount your state allows you to protect in a Chapter 7 case, you might want to file a Chapter 13 case. A means test is used to determine if someon is eligible for Chapter 7 bankruptcy.

If they don’t qualify, they can apply for a Chapter 13, which sets up a five-year payment plan but ends penalties and interest on your debts. An attorney will try to negotiate reduced paybacks with unsecured debtors such as credit card companies, depending on your income and assets.

In both Chapters 7 and 13, all assets in 401 (k) plans are protected, except for federal tax debt.

Steps To Take Before Filing for Bankruptcy

There are several avenues for alternative debt relief. “People can resolve their debts through what’s called debt settlement. They can do it on their own, or they can do it through an attorney or a debt settlement company,” says Jump.

Debt settlement may sound like an attractive option, but there are downsides. “Typically, people would have to do debt settlement one creditor at a time. A lot of times, this requires them to make lump-sum payments to their creditors to secure attractive resolutions. That’s very difficult for people to accomplish when they don’t have that type of liquidity.”

Another bankruptcy option is to work with a credit counseling agency. However, the debtor must be careful with this option. A reputable credit counselor will provide services to help people get out of debt. There are also less reputable agencies that will demand large up-front payments. Then, they do very little to help the debtors find a fresh start. Generally, trustworthy credit counseling organizations are nonprofit.

Debtors will often end up in a “situation where creditors have begun legal action against you. At this point, you really need to immediately contact a bankruptcy lawyer because, more than likely, that lawsuit is going to result in a judgment. And that judgment will result in wage garnishment, which can be very expensive and take a heavy toll on your paycheck every month. It can potentially make it very difficult for you to resolve the rest of your debts,” Jump explains.

In contrast to these piecemeal debt settlement options, bankruptcy provides immediate relief. As soon as an individual files bankruptcy, bankruptcy courts issue an order called an automatic stay that stops creditors from pursuing:

• Debt collection calls
• Foreclosure
• Wage garnishment
• Lawsuits

The Bankruptcy Filing Process: An Overview

When it comes to filing for bankruptcy, “Unfortunately, it involves a lot of bankruptcy forms. This sort of goes to the point that you really need an attorney to help you make sure you have the documentation put together,” says Jump.

To get the process going, you will need to:

• Submit a bankruptcy petition. Provide your personal information on this form.
• Pay the filing fee. This can be done electronically or at your local bankruptcy court.
• Compile schedules. You will have to submit several schedules or lists to the bankruptcy court, including a schedule of assets listing the things you own and a schedule of all your debts.

Timeline of Filing for Bankruptcy

As for the timeframe of filing bankruptcy, “It can be a streamlined legal process if clients can provide their attorneys with all the information that they need — for example, pay stubs, tax returns, copies of their vehicle titles, or mortgage deeds. If all the documentation is available, then it would be expected that an attorney would be able to get the case filed in relatively short order,” says Jump.

However, things often don’t go as smoothly as hoped. “It’s often challenging and often overwhelming for clients to get their hands on all that documentation as quickly as they would like. For that reason, it can take two weeks to a month to get a filing ready,” says Jump.

If you have an ongoing personal injury claim, it’s crucial to speak with a bankruptcy lawyer. Depending on the timing of the case, the settlement or court ordered compensation may be subject to the bankruptcy.

What To Expect After You File for Bankruptcy

Once you file, legal protections take immediate effect, stopping foreclosure, garnishment, and collection actions.

The bankruptcy trustee will communicate with the filer to request verification by requesting documentation. In many cases, the debtor will be required to participate in credit counseling. This will typically be a condition for the discharge of the debt. The bankruptcy judge will outline how and when to complete these courses.

Be prepared for the creditor to object to the bankruptcy filing. These creditors risk their debt being discharged, which would mean they do not receive the repayment the debtor initially agreed to.

Once the bankruptcy discharge is complete, it will appear on your credit report. Your credit score will drop. However, with the debt relief, you should be able to make on time monthly payments. This will help build your credit moving forward. It’s important to have debt management mechanisms in place to ensure you don’t accumulate too much debt again.

How To Choose a Bankruptcy Attorney

When deciding which attorney to call, Malter suggests getting a referral or looking for a certified bankruptcy specialist in states like California that offer such certification.

“Go with an attorney who can demonstrate a track record of successful bankruptcies,” he says. “Somebody who just dabbles in bankruptcy can get themselves and their clients in a lot of trouble. You want somebody who eats and breathes this stuff.”

To get the most out of your consultation, bring a list of all your creditors, the amounts owed, and your major assets and their values.

Find Legal Help

“If people are experiencing financial difficulty, they shouldn’t feel as though contacting a bankruptcy lawyer is their last stop. It should probably be one of their first stops as they’re trying to explore professional opinions and help for their finances,” says Jump.

Visit the Super Lawyers directory to find an experienced bankruptcy lawyer.