A Step-By-Step Guide
Understanding the Basics
Filing bankruptcy is a voluntary act. No American is required to file bankruptcy. Before a bankruptcy case is filed a bankruptcy filer must answer a fundamental question: should you file a bankruptcy case with or without the benefit of a skilled bankruptcy attorney? With an attorney, the person filing bankruptcy can rely upon the attorney's extensive knowledge of substantive bankruptcy laws and bankrutpcy procedures. A trained bankruptcy attorney can guide the person filing bankruptcy through the process towards a successful result.
The person filing bankruptcy must do considerable work prior to a bankruptcy case ever being filed. Financial documents must be gathered, including the following: tax returns; pay stubs/pay advices; list of creditors and any bills or invoices available; bank statements; list of assets; etc. Next, the bankruptcy attorney must review the documents and create a series of bankruptcy documents called the petition, schedules of assets and liabilities, schedules of income and expenses, statement of affairs, notices, and perhaps a repayment plan. Also before the bankruptcy case is filed, the person filing bankruptcy must complete a credit counseling course within 180 days of the case being filed; the course must be taught by an organization approved by the U.S. Trustee's office.
A bankruptcy case is begun by filing the bankruptcy papers with the Clerk of the US Bankruptcy Court. The clerk of the court then scans the documents into the court records. Next, the clerk of the court notifies all creditors that the case has been filed. The clerk sends notices to the addresses listed by the person filing bankruptcy in the schedule of debts filed. The US Trustee's office then assigns a trustee to the case. The trustee's job is to review the documents submitted by the person filing bankruptcy. The trustee may also take possession of non-exempt property in a Chapter 7 bankruptcy case. The trustee does not take possesion of any property in a Chapter 13 bankruptcy case
The person filing bankruptcy must tender additional documents to the trustee promptly after filing the bankruptcy case. The trustee must be sent pay stubs/pay advices for the 60-day period immediately prior to the bankruptcy case filing. The person filing bankruptcy must also tender to the trustee tax retuns or tax transcripts. In a chapter 7 bankruptcy case, the trustee must receive the most recent tax return. In a chapter 13 bankruptcy case, the person filing bankrutpcy must tender to the trustee tax returns for the four most recent tax years.
Prior to the trustee meeting, the U.S. Trustee's office should have reviewed the means test document filed with the court. The US Trustee typically does not contact the person filing bankruptcy to indicate that it has no objection to the case. However, the US Trustee may file a motion to dismiss the case if the means test document indicates that the person filing bankruptcy has adequate income to fund a repayment plan. The US Trustee must file a statement within ten days after the creditors' meeting if it appears from the paperwork or information gleaned in the creditors' meeting that the income of the person filing bankruptcy is over the state median without sufficient deductions for expenses. The means test is a very complicated and confusing test; this test is certainly beyond the ability of most people not skilled in bankruptcy law.
Next, the trustee conducts the Section 341 meeting of creditors. Both the person filing bankruptcy and the bankruptcy attorney would attend the meeting. The trustee also attends the meeting with any creditors who wish to attend. The meeting is typically conducted between 20 to 40 days after the bankruptcy case is filed. This creditors' meeting is the only personal appearance most bankruptcy filers need to make. The bankruptcy judge assigned to the case does NOT attend the meeting. Plus, creditors seldom attend these creditors' meetings. The trustee conducts the meeting and asks questions about the bankruptcy documents submitted to the court and about other financial information.
One of the jobs of a chapter 7 bankruptcy trustee is to review all assets owned by the person filing bankruptcy. The bankruptcy filer has the right to keep all exempt assets, as defined by law. However, the trustee could seize all non-exempt assets and attempt to liquidate the assets to generate proceeds to pay to the unsecured creditors. In that case, negotiations are held regarding the non-exempt property. The trustee generally gives the person filing bankruptcy the chance to buy the assets back from the bankruptcy estate administered by the trustee. If negotiations fail, then the trustee could required the person filing bankruptcy to tender to the trustee the nonexempt assets so they could be sold for the benefit of the unsecured creditors.
Secured property is a different matter that is dealt with differently. The trustee could seize and sell any secured property that has significant non-exempt equity. On the other hand, the trustee typically has no interest selling any piece of property that has little to no non-exempt equity. So, a person filing chapter 7 bankruptcy could keep their home if current on mortgage payments and has no significant non-exempt equity in the home. But the person filing bankruptcy must also consider the debt owed to a vehicle lender who is secured by a car, truck, or van. If a vehicle is owned by the person filing bankruptcy, then the secured debt must be reaffirmed or the person filing bankruptcy is required by the bankruptcy laws to surrender the vehicle to the lender.
The bankruptcy court could hold a court hearing to review any reaffirmation agreement executed by a lender and a person filing bankruptcy. The person filing chapter 7 bankruptcy must certainly attend a court hearing on reaffirmation if the person filing bankruptcy was not represented by a bankruptcy attorney. At the hearing, the bankruptcy court reviews the terms of the reaffirmation agreement and makes a determination whether the debt is affordable to the person filing bankruptcy.
Finally, before a chapter 7 case is concluded, another round of budget counsel needs to be completed before the person filing bankruptcy would receive the bankruptcy discharge. The first round was called credit counseling and had to be completed prior to the bankruptcy case being filed. This second round is similar, but different from credit counseling. The second round requirement is called debtor education. Like credit counseling, the person filing bankruptcy must complete the debtor education and receive a certificate proving that the debtor education course was completed. That certificate must be filed with the Clerk of the US Bankruptcy court before the bankruptcy case is closed. If not, the case will be closed and the person filing bankrutpcy would not receive a discharge. Assuming the debtor education certificate was filed, then the court will enter a bankruptcy discharge roughtly 90 days after the bankruptcy case is filed. The court mails a notice of discharge to all parties that discharges all debts that can legally be discharged. Finally, the bankruptcy case is closed after the trustee distributes any proerpty collected from the person filing bankruptcy, if any.
After the Section 341 meeting of creditors, the bankruptcy court must conduct a confirmation hearing to determine if the repayment play propsed by the person filing bankruptcy complies with all of the requirements set forth in the bankruptcy laws. The bankrutpcy laws require specific treatment that differs for secured creditors, priority creditors, and non-priority unsecured creditors. Generally, the secured creditors must be paid in full unless the debts can be modified or crammed-down. Mortgage lenders are entitled to receive full contractual payments for all mortgage payments coming due after the bankruptcy case has been filed. However mortgage lenders have to wait a period of time to receive the mortgage arrearages owed at the time the bankruptcy case is filed; typically, the mortgage arrearages are repaid on a month-by-month basis over a period of years. The priority creditors must be paid in full unless a creditor agrees to less than full payment. The non-priority unsecured creditors can be crammed-down and paid as little as 10% of the claim in some situations.
Creditors and the chapter 13 trustee review the draft repayment plan for compliance with the bankruptcy laws. Typically, a creditor or the trusee will file an objection to the confirmation of the original repayment plan. In response, the attorney for the person filing bankruptcy will carefully review the objection. It is not unusual for the originally proposed repayment plan to be modified by an alternative repayment plan responding to the objection. The bankruptcy attorney could consult with both the objecting creditor and the trustee to resolve any objections prior to appearing before the bankruptcy court at the confirmation hearing. These negotiations may prove successful and the court could confirm the modified repayment plan at the original confirmation heairng. But, multiple confirmation hearings are not unusual. Eventually, the court will decide whether the modified repayment plan complies with the bankrutpcy laws. If so, the court will confirm the plan and the trustee will start administering the funds paid by the person filing bankruptcy to the creditors who file claims. In not, the court will deny confirmation of the plan. Thereafter, the trustee could file a motion to dismiss the chapter 13 bankruptcy case because of the confirmation denial.
Finally, before either a chapter 7 or a chapter 13 case is concluded, another round of budget counsel needs to be completed before the person filing bankruptcy would receive the bankruptcy discharge. The first round was called credit counseling and had to be completed prior to the bankruptcy case being filed. This second round is similar, but different from credit counseling. The second round requirement is called debtor education. Like credit counseling, the person filing bankruptcy must complete the debtor education and receive a certificate proving that the debtor education course was completed.
That certificate must be filed with the Clerk of the US Bankruptcy court before the bankruptcy case is closed. If not, the case will be closed and the person filing bankrutpcy would not receive a discharge. Another requirement has to be satisfied too. The person filing chapter 13 bankruptcy must certify that all domestic support obligations coming due during the pendency of the bankruptcy case have been paid. Assuming the domestic support obligation certificate and the debtor education certificate were filed with the clerk of the court, then the court will enter a bankruptcy discharge after the final payment is made pursuant to the confirmed repayment plan. The court mails a notice of discharge to all parties that discharges all debts that can legally be discharged. Finally, the bankruptcy case is closed.