By  Fri Jan 24, 2014

Bankruptcy Filing Process Explained

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Millions of American struggle with debt, and many of those who cannot repay their loans end up filing for bankruptcy.

According to U.S.Courts.gov, bankruptcy cases are down 12 percent from 2012 to 2013.

In case you need a refresher, bankruptcy is defined as an individual or person that does not have the ability to pay back their debt. A bankruptcy most commonly occurs when a person or business files on their own, but a creditor may file on behalf of a person if they have an outstanding debt balance. During the bankruptcy filing process, the assets of the person or business are evaluated, and if the determination is that they cannot pay their debt, they are relieved of the obligation.

Bankruptcy filing process explained

The most common form of bankruptcy in the United States is Chapter 7 bankruptcy. When filing for Chapter 7, also known as liquidation bankruptcy, a person attempts to release all obligations to pay their debt. Basically a person’s assets (such as a second vehicle) are sold to pay off their debt. Once the debt is paid he or she is cleared of any financial obligation to their creditors. Even though most debt is cleared after a bankruptcy, a person may still owe debt that must be paid, this is known as nondischareable debt (which will be explained below).

Before a debtor can begin the bankruptcy process he or she should gather their financial records to fill out the necessary forms to file for bankruptcy. The forms required to file include the bankruptcy petition, statement of financial affairs, as well as a variety of other documents. The documents required to file can be found at the county clerk’s office, but a fee is required to obtain the documents. The purpose of the documents is to allow a debtor to open their financial life to the bankruptcy court.

In order for a person to successfully file for bankruptcy they must first pass a means test. This test calculates your income in relation to your debt, if it is determined that you are unable to pay your debt then you will continue through with the process of filing for bankruptcy. Anyone that fails the means test may still file bankruptcy, but must file a chapter 13 bankruptcy. This type of bankruptcy requires a person to make monthly payments anywhere from three to five years. The terms of a chapter 13 bankruptcy are decided in bankruptcy court.

The next step in the process of filing for bankruptcy is a meeting of creditors. In this meeting, all of a debtor’s creditors will meet with the trustee. The trustee will ask questions related to the financial documents of the debtor, and will determine whether or not they have a reasonable case to file for bankruptcy. If there are no major disputes, the trustee will move forward with the bankruptcy process, which is to sell the assets of the debtor (except for chapter 13 bankruptcy, which will be explained later). Assets are sold to pay back as much debt as possible to creditors, then the debtor is discharged from their obligation to pay.

Nondischargeable debts

Not every type of debt can be cleared from a person’s record. That means there are some forms of debt you will be liable to pay for, no matter your financial situation. Student loans, child support, alimony, and most taxes are amongst the debts that cannot be included in the bankruptcy.

A creditor must file a lawsuit and the court will determine what is and isn’t forgiven for a person faced with debt. Most nondischargeable debts are determined as a result of fraud or false pretenses. An example of a nondischargeable debt would be someone that takes out a loan to make home improvements but instead uses the money to buy a new vehicle and go on a trip. (Continued on page 2)

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