How does bankruptcy work?

There are many ways to answer the question “How does bankruptcy work?”

A Summary of Bankruptcy, Why It Exists and What It Can Do

The basic idea of people getting relief from debt has been a part of our society as long as history itself. Even in biblical history there is a jubilee year where people are supposed to forgive debts every 7th year.

The practice of filing bankruptcy is hugely common in the United States. Millions of Americans file bankruptcy every year. It is likely that many people you know filed bankruptcy. They just don’t tell everyone.

The basic idea is that every seven or eight years, people should have their debts forgiven. The existence of bankruptcy protection in the US comes from a desire to prevent ‘debtors’ prisons’ and other situations where people are ‘captured’ by creditors. Think about it. If you owe more debts than you can ever pay, and all you do is work day after day to pay those debts, what are you? Are you really free? Is it fair to lend someone money and then force them to work until they die in order to pay it back? Our society says it is not fair to do that. So, we created bankruptcy laws.

They are a legal way that people can get freedom from their debt every 8 years. These laws are particularly important to protect borrowers from predatory lending. Predatory lending is when you give someone money and intentionally make it very hard for them to pay it back. Predatory lenders use high interest rates, finance charges, excessive late fees, and administrative difficulty (long hold times and difficult channels of contact) to make it harder for you to pay them back. Why? So, they can make money. They lend $100 and they get paid $200 back. Our government created bankruptcy to protect you from these predatory lenders, and in order to give you a break when you are unable to pay your debt.

When you file bankruptcy, you are basically telling the court three things:

1. I can’t afford to pay this debt anymore.
2. I don’t have anything that you could sell in order to pay creditors (most of my clients are allowed to keep their house and cars).
3. I am an honest person. I got this debt thinking I would be able to pay it back, but things happened and I couldn’t keep up.

If these three things apply to you, and you feel like you could say them to the court, bankruptcy was created for you. Bankruptcy can give you a new fresh start without creditor harassment.

Here are some other questions people often have about bankruptcy

• Can I keep my house?
• Can I keep my car?
• Will bankruptcy ruin my credit?
• How long after bankruptcy can I buy a house or car?
• What kind of debt will bankruptcy get rid of?
• How much does bankruptcy cost?
• Will bankruptcy stop a garnishment, bank freeze or law suit?
• Do I have to repay my creditors?

• Can I get rid of student loans?
• Can I get rid of tax debt?
• How often can I file bankruptcy?
• How will bankruptcy impact my family, spouse and children?
• What if I co-signed for someone else’s house or car?
• What if I am not a US citizen?
• Can I file bankruptcy for my business?
• How do I choose a good attorney?

The Three Main Kinds of Bankruptcy

There are several kinds of bankruptcy. However, there are really only two that most people reading this would need. The third is mostly for corporations.

Chapter 7 bankruptcy

The first and most famous and most common kind of bankruptcy is “Chapter 7”. It is called chapter 7 because the laws that guide that kind of bankruptcy are found in “Chapter 7” of the bankruptcy code.

Chapter 7 bankruptcy is the kind where you obliterate all of your debt from credit cards, medical bills, non-fraud-related law suits, car loans on repossessed vehicles, mortgages for houses you don’t want to keep, some tax debt and many other kinds of debt. With this kind of bankruptcy, you eliminate the debt all at once!

Chapter 13 Bankruptcy

The second kind of bankruptcy is Chapter 13 bankruptcy. Just like Chapter 7, Chapter 13 gets its name because the chapter of the bankruptcy code that explains the law for this kind of bankruptcy is “Chapter 13”.

Chapter 13 bankruptcy is a kind of bankruptcy where you repay some or all of your debt over a period usually from 36 to 60 months.

Chapter 13 is usually for people who fall into one of the following five categories:

1. You have too much income for Chapter 7 bankruptcy.
2. You have an asset (perhaps a house) that is so valuable that it would not be safe in a Chapter 7 bankruptcy.
3. You have a kind of debt that won’t be wiped out in a chapter 7 bankruptcy and you need extra time to pay it.
4. You have filed chapter 7 bankruptcy within the past 8 years.
5. You want to get rid of a second mortgage or reduce your liability on your car loan.

Chapter 11 Bankruptcy

The third kind of bankruptcy many people have heard of is “Chapter 11”. Chapter 11 is usually for corporations and businesses that need to keep operating, but are unable to pay their debts. We have seen General Motors, Chrysler, and many other major corporations file Chapter 11 bankruptcy. What happens in this bankruptcy is that the business keeps operating, but the revenue and expenses are monitored by a “trustee” whose job is to make sure of two things:

1. The trustee protects the company from creditors and prevents creditors from suing, freezing assets and wrecking the business.
2. The trustee protects the creditors to make sure they are paid fairly and that the company owners don’t run off with the income without paying the creditors.

The ten steps of bankruptcy (more likely only 8 steps if you have a good attorney)

Step One

Find a trusted and experienced bankruptcy attorney. You don’t have to use an attorney to file bankruptcy but it is very dangerous not to. There are many things that might seem very innocent and unimportant to you that can get you in a lot of trouble. The law is tricky and the law can be heartless. Many people who try to save a few bucks on a bankruptcy attorney end up losing houses or cars or other things that belong to their friends and family. Bankruptcy, particularly after the new bankruptcy law, is not something a careful person would try without an attorney.

Step Two

Send your paperwork problems to an attorney.

Step Three

Work with your attorney to make sure the bankruptcy paperwork (called petition and schedules) is all accurate and complete. Petition and Schedules consist of over 40 pages that must be filled out in order to get a bankruptcy. We fill this out for you based on the information you provide. Then you verify it and approve us to file it.

Step Four

Take credit counseling. This is a one-hour long course that you can take from your home computer or on the phone.

Step Five

File your bankruptcy!

Step Six

Go to your bankruptcy hearing where you are examined by the bankruptcy official, called a trustee.

Step Seven

If your case is approved then you are done. Almost all of our cases end this way. If your case is not approved at the first hearing, then usually the trustee wants some extra documents.

Step Eight

Return for a second examination (this is only if you had problems with step six or seven)

Step Nine

Take the second part of your credit counseling.

Step Ten

Wait for your discharge (when your applicable debt is totally and permanently eliminated).