How Does Bankruptcy Work?

How does the Bankruptcy process work? The Bankruptcy process usually starts with talking to a qualified attorney. The Attorney will as you a bunch of questions pertaining to your financial history, past due accounts and assets you own. He or will direct you to provide a bunch of documents proving the account #'s and amounts currently in each. Once they have all this information they will file a court date to plead the case and determine the terms of the bankruptcy filing.

A Chapter 7 bankruptcy is a complete discharge of all debt, not including the non-dischargeable debts of mortgage, student loans, alimony and child support and income taxes.

While a Chapter 7 will not temporarily alleviate past due mortgage payments nor stop a foreclosure the benefit of a Chapter 7 with regards to foreclosure is the ability to free up monthly income previous used to pay other debts and instead devote that income to the mortgage payments.

The paperwork required for the Chapter 7 is much the same as it is for a Chapter 13 filing.

  • Bankruptcy petition
  • List of all creditors outstanding, the balance and current monthly payments
  • Copies of the previous six months bank and investment statements
  • Most recent paystubs from your employer
  • W2s and 1099s from the previous two years
  • Signed and dated tax returns from the previous two years
  • Evidence of completing a consumer credit counseling course

Any secured property you wish to keep may not be included in the bankruptcy. For example, if you owe $20,000 on an auto loan and include that auto loan in the bankruptcy you do not get to keep the vehicle, you simply don't have to pay the auto loan any longer and the car company can't try and get the money from you at any point down the road.

There are exemptions in a bankruptcy. Exemptions are those assets that you are allowed to keep and not be included as an asset that a trustee may for you to surrender such as jewelry, stock or an automobile in which to get to work. There are limits to an automobile exemption and allowances can be made to allow you to keep the automobile if the value of the automobile is below state limits. However, if you own two cars, and one of them is a late model BMW that you own, be prepared to have that vehicle impounded and sold in order to pay off creditors.

Exemptions from a bankruptcy filing are typically listed in a dollar amount associated with the asset. For example, California has multiple exemptions including a limit for a motor vehicle at $3,525 and an exemption amount for personal jewelry and works of art of $7,175. Nevada also has a complete list of exempted items and associated limits for things such as household goods, jewelry and other items.

For a complete list of exempted items and their associated limits in dollar amounts, consult your attorney or visit the state's appropriate bankruptcy exemption list.

A Chapter 7 covers all outstanding debt, collection accounts and judgments. It essentially wipes the slate clean and doesn't set up any repayment plans for your creditors but it does not give you time to repay your overdue mortgage payments. Your bank will still proceed with a foreclosure.

While Chapter 7 might seem the easier of the two there is a means test that limits who may and may not file for a complete discharge of debts using a Chapter 7 bankruptcy.

This means test averages all your income over the previous six months and uses that amount as your qualifying income. Your qualifying income may not exceed must be less than the median income for a household in the state in which you live. If your income is below the median income, you can file the Chapter 7. If it is above, you have no choice but to file for Chapter 13.

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