Preparing for Bankruptcy

Preparing for Bankruptcy

This section discusses some things you must do, or may wish to do, prior to filing for bankruptcy. It explains some techniques that may be used to help improve your situation, and discusses some serious problems that can be encountered by certain attempts to gain an advantage.

Basic Legal Requirements

There are certain basic requirements that must be met in order to file for bankruptcy. Some of these apply to Chapter 7 cases, some apply to Chapter 13 cases, and some apply to both.

Means Testing

In general, you will not be able to file under Chapter 7 of the Bankruptcy Code unless you meet certain financial requirements. If, under the guidelines established by Congress, your financial means (ability to pay) are too great, you will not be permitted to discharge your debts under Chapter 7. Instead, you will need to work out a debt payment plan under Chapter 13.

First, your family income over the past six months will be examined, and if it falls below the median income for your state, you will be able to use Chapter 7. If it is above the median income, the court will then look at your ability to pay your debts. The judge takes your income, subtracts certain allowable expenses, and determines whether you have enough money left over to pay at least a certain amount per month to your creditors. If you do have such sufficient leftover money, you will need to file under Chapter 13.

Credit Counseling

Before you can file for bankruptcy under either Chapter 7 or Chapter 13, you will need to see a credit counselor who is approved by the U.S. Trustees Program. This must be done within the six-month period before filing.

Before your case can be concluded under either Chapter 7 or Chapter 13, you will need to complete a course on financial manage­ment given by an approved debtor education program. This does not need to be done before you file, but must be done before the court will discharge any of your debts.

Saving Your Home and Car

Bankruptcy courts understand that a person's home and car are essential to his or her life. There are rules that may allow a person to keep his or her home or car under what is called a "homestead exemption" or "automobile exemption."

Homestead exemptions vary by state and marital status, but the basic concept is simple. If you have more equity in your home than the amount of your state's homestead exemption, you will be forced to sell your home to pay off your other debts. If your homestead exemption is higher than the amount of equity in your home, you may be able to keep your home even after you file for bankruptcy.

Example: If you have $25,000 in equity in your home, and your state's homestead exemption is $50,000, you may be able to keep your home. If your equity is $150,000, the court will force the sale of your home in a chapter 7 bankruptcy proceeding. However, you could file chapter 13 bankruptcy and still keep your home.

Automobile exemptions are very similar to homestead exemptions. However, if you are behind on car payments in a chapter 7 proceeding, the lender that made your car loan may still repossess that car in the proceeding if you do not make all back payments. By contrast, a chapter 13 proceeding might allow you to prevent such repossession even if you are behind on payments.