Despite going through extreme financial difficulties, people often refrain to file for bankruptcy, probably because they are unclear of the entire procedure. For individuals who are going through a tough financial situation, Chapter 7 bankruptcy is the best bet as it offers people to start life afresh. In this case, your non-exempt assets are surrendered and sold off to pay the creditors. Any unsecured debt left after payment is discharged. The state of California has two systems of exemption to protect your assets, thanks to which the majority of debtors don’t require to surrender any assets. Here’s what happens when you choose to file for bankruptcy:
- Decision to file
Filing for bankruptcy is an important step and therefore should not be taken lightly. You need to collect all your financial information, as well as a list of your assets and debts. The debts should be arranged into two piles for secured and unsecured debts. The former includes mortgage and auto loans while the latter includes credit card and medical debts.
Filing for bankruptcy removes all your unsecured debts while secured debts like mortgage and car loans are not discharged. Thus, if you are struggling with secured debts, filing for bankruptcy won’t provide you with much respite except if you agree to submit that asset. The pressure of unsecured debts can be eliminated by ensuring that secured debt payments are managed properly.
It is important to consider a few points before filing for bankruptcy, the primary being your budget. Other factors include adjusting your budget to pay off debts, whether you have been sued for collection, or face any foreclosure or repossession proceedings, etc. In case your financial situation is such that you cannot pay off your creditors, bankruptcy is perfect for you. It stops all kind of collection actions including foreclosure, repossession, lawsuits as well as wage garnishment.
- Credit counseling
A mandatory credit counseling session should be completed by bankruptcy filers within 180 days of filing. This involves sessions with a credit counselor to manage finance and debts without seeking bankruptcy relief. Since credit counseling is mandatory, you need to show proof in court for the same or your case might be dismissed.
The course offers an excellent way to evaluate your finances, merge certain debts and reorganize finances so that you don’t have to file for bankruptcy. If however, even after the counseling session, bankruptcy appears to be the ideal choice for you, then you need to consult an attorney.
- Hire bankruptcy attorney
Though you can file for bankruptcy without an attorney too (pro se), it is not recommended much as bankruptcy is a complicated process, which requires the expertise of professionals like Dallas based law firm Recovery Law Group . Discussing your financial situation with an bankruptcy attorney can make you aware if bankruptcy is the best option for you or any other debt management approach is more suitable. Apart from this, the attorney can help determine which chapter of bankruptcy would be best suited in your case. Ideally, Chapter 7 is best, if you are able to qualify for it; if not, then Chapter 13 can help you get out of the financial mess.
- File for bankruptcy
If you decide to file for Chapter 7 bankruptcy which ideally manages to discharge all your unsecured debts, you need to prepare papers accordingly and file them. The papers include information about all your debts as well as creditors, your assets, expenses, and your income; apart from financial transactions that have taken place over a stipulated period of time.
Filing of bankruptcy papers results in you getting automatic stay benefit which puts a stay on all kind of creditor action. This helps in getting your finances sorted without additional pressure due to constant creditor harassment. The creditors are notified of your bankruptcy by the court to ensure that they are aware of the proceedings as well as do not violate the automatic stay.
- Review of your case by the trustee
Bankruptcy filings are handled by local Bankruptcy Trustee who manages the entire process by mediating between the debtor and the creditors to ensure transparency and honest dealing. The trustee evaluates the assets to divide them into exempted and non-exempted ones. Each state has a different exemption system to safeguard your property. California has two exemptions in place, with equity in assets. Equity is the value of asset devoid of any debt attached to it. If your house is evaluated at $300,000 and you owe $250,000 on the mortgage loan, your equity in the property is $50,000. Thus bankruptcy exemption covers this equity amount.
Any financial transactions conducted in the previous few years are also scrutinized by the trustee to find out if any of those transactions benefitted any creditor. If you transfer any asset prior to bankruptcy filing to any family member or friend, the action is considered fraud. The court views such transactions as dubious methods of protecting property during bankruptcy proceedings and generally undo such transactions. Majority of property in bankruptcy cases is exempted, while any non-exempt property is sold off. Any fraudulent transactions if detected might result in dismissal of your bankruptcy case. Thus it is important to display complete transparency of your finances or you might lose assets or your case might be dismissed.
- Creditors’ meeting
After the case review by the trustee, a meeting of creditors, known as “341 hearing” is scheduled. This meeting takes place within 21 & 40 days after the bankruptcy filing. The meeting is attended by you (the debtor), your attorney, and the bankruptcy trustee. The creditors may or may not attend the hearing depending if they have any opposition to the bankruptcy filing.
You are required to produce certain documents like photo identity, social security, mortgage loan papers, lease agreement, bank statements, etc. The trustee asks questions (after you are sworn)regarding your bankruptcy filings like your financial history and important financial transactions. Once the trustee is through with the questions, creditors (if any) present during the hearing can raise their queries like your plan of handling secured debts, etc.
Once this is over, the trustee can ask for more pertinent documents or if you wish to amend your bankruptcy filing. If you opt for latter, a second hearing is scheduled with new documents and revised filing evidence.
- Handling of secured debts
Secured debts like a car loan or mortgages need to be handled carefully. If you lag behind in making payments on them, creditors may request the court to lift automatic stay benefit to allow repossession or foreclosure. If you are up-to-date on payments, you can choose between giving up the property and reaffirming the debt. When you choose the latter, you agree to make payments on the debt in a prescribed manner. A reaffirmed debt is not discharged later in bankruptcy. Thus it is important to be sure if you can continue making payments on said property or not.
- Bankruptcy process
Any non-exempt property that you possess needs to be surrendered to the trustee. The property is sold off and the money is distributed among the creditors. It is important to note that since most property is protected by bankruptcy exemptions (state and federal), most debtors don’t have to part with any property. The secured debts are treated as per your loan status and your choice of whether to give up property or to reaffirm the debt.
- Discharge of debts
After selling off of any non-exempt property to pay off creditors, and handling of secured debt loans, any unsecured debt (credit card bills, medical debt, and personal loan) which remains is discharged, i.e. it is legally forgiven. This ensures that creditors can no longer harass you or your family member to collect the dues. Some debts like child and spousal support, student loan debt, certain government taxes, and duties cannot be discharged. They need to be paid off after your bankruptcy discharge.
- A fresh start awaits you
You can begin your life again with a clean financial start. Though bankruptcy affects your credit score negatively, in most cases, it was already gone for a toss. However, with a clean slate, you can make efforts to build your credit score. The first step is to get a credit card, preferably a secure one and make small charges on it which are paid in full and on time. This habit can improve your credit rating in a couple of months.
If you are going through a bad financial phase and are on the verge of filing for bankruptcy, consult bankruptcy attorney California at 888-297-6203 for a solution to your financial problems.