From the outside, bankruptcy might look like Darth Vader, Hannibal Lector, and the Big Bad Wolf rolled into one, but once you break it down into component parts, it’s actually not that scary. That isn’t to say it’s always easy. Filing for bankruptcy can be emotionally debilitating, and the time frame can easily stretch into several months or even close to a year. When you look at the actual steps to the bankruptcy process, there are three main ones not to overlook. Whether you file for Chapter 7 or 13, the experience will be much the same. Here they are in order of appearance.
1. Financial Inventory and Credit Counseling
The moment you start seriously considering bankruptcy should be shortly followed by the realization you need to collect detailed information about your financial life. This likely isn’t something you will be able to throw together to the court’s satisfaction in an afternoon. While you’re at it, might as well pull together your spouse’s information too, even if he or she is not joining you in the bankruptcy. The court will ask to see it, and you better have it ready.
The categories to focus on for this inventory includes:
Debts: Include all debts here, both the ones you are current on and those you are not. At the minimum, you’ll need to be able to show the creditor, balance, interest rate, and monthly payment.
Income: This is where to list any income received in the six months and any you expect in the near future. The only thing you can leave out of this is Social Security. Everything else is fair game.
Assets/Property: Got anything of value? The court wants to know. List vehicles, property, and investments. Even personal items and household furnishings go onto this list. Some may eventually be considered exempt, but should be revealed up front.
Monthly Living Expenses: The court wants to know how much you need to live in an average month. Include gas, food, rent, medical expenses, insurance, child support, utilities, etc. The rule of thumb here is to mention it if it’s something that requires out-of-pocket payment on a regular basis.
Credit Counseling: After all the previous is collected, make an appointment to see a credit counselor. You must provide proof of this before you will be allowed to file for bankruptcy. Who knows? You might figure out a way to avoid that and the accompanying credit score destruction. It should cost less than $100.
2. Meeting With Your Creditors
Once your petition has been filed and accepted by the court, all the creditors you list will be sent a notice that you are filing for debt forgiveness. This creates an automatic cessation of payments from you to them, which means they can no longer employ any type of collection method to recover the debt. Three to six weeks after the notice, the trustee (court’s representative who handles your case) will call a meeting with any interested creditors. Creditors are not required to show up, but they may. You must be there. The meeting’s purpose is twofold. Creditors are allowed to question you, though the trustee should keep them from getting aggressive. Secondly, the trustee will make sure you understand the consequences of bankruptcy and still want to go through with it.
During a Chapter 13 bankruptcy, this meeting is where you present a payment plan for creditors to inspect. Unlike the Chapter 7 procedure, a Chapter 13 bankruptcy includes the filer making monthly payments to creditors over a three-to-five year period. While it might fall short of a complete reimbursement, depending upon your income, there will be at a partial making good on the debt.
3. An Official Discharge of Your Debt
At some point towards the end of the process, you will be required by the court to complete a post-bankruptcy credit counseling session. With Chapter 7, this is done within 45 days of the creditors’ meeting. In Chapter 13, the counseling must happen before you make your final payment and request to have the rest of your debt officially discharged. If given final approval, you will no longer legally owe any of the money included in your initial petition.
Receiving a discharge of debts in court does not offer you an immediately clean financial slate. A Chapter 13 bankruptcy will show up on your credit report for seven years. A Chapter 7 will be visible to anyone who wants to view your credit for a full ten years. Keep this in mind before you file. Rebuilding credit in the aftermath of a bankruptcy is a slow, tedious, frustrating process but, depending on the particular circumstances that drove you to court in the first place, perhaps a welcome alternative.