The U.S. Bankruptcy Code is an extremely complicated law, but the idea for most bankruptcy clients is simple: the law allows you to discharge (avoid having to pay) all of your debts, in exchange for giving up excess property. For many clients, there is no excess property, so the cost of bankruptcy is limited to the one-time fee you pay.
Before you file for bankruptcy, you must take a credit counseling course. Several companies including DECAF and DebtHelper offer these classes for a nominal fee. The courses can usually be taken at home or on the internet. You must submit the certificate from completing the class with your petition in the bankruptcy case.
When you file a bankruptcy case, you must fully disclose all property you own and all details of your financial affairs for the past six months. At the time you file, all your property temporarily comes under the control of the United States Trustee - an official who is responsible for seeing that your creditors are repaid. This does not mean that the Trustee gets to take your home or your car or personal items - you retain possession of all these things; but you're not allowed to sell or mortgage them. Also at that time, an "automatic stay" goes into effect, preventing any of your creditors from attempting to collect on the debts you owe. The bankruptcy applies only to creditors that you have listed in the petition and notified of the case, so it's very important to list them all.
A month or two after the case is filed, you will attend a court appearance called the 341 Meeting of Creditors. You and your lawyer will meet with the Trustee. You must have your most recent tax returns and past six months' of pay stubs or proof of other income, if you have any. Your creditors can also appear, and try to argue for why they should be repaid before other creditors.
The Trustee is charged with repaying your creditors to the greatest extent possible. They do this by selling your property to pay off your debts. However, the law makes certain property exempt from sale - the Trustee cannot touch it. This includes up to $3,000 in household goods, up to $1,800 in clothing and jewelery, most pensions, any medical gear or health aids proscribed for you or your dependents, up to $3,000 for a vehicle (if your car is worth less than $3,000, by the Kelly Blue Book value, the Trustee can't touch it. If it's worth more than $3,000, the Trustee will order the vehicle sold, pay you the first $3,000 of the proceeds, and distribute the rest to your creditors.), and more. Note that these exemptions are based on state creditor protection laws, even though bankruptcy is a Federal court proceeding under Federal law. The exemptions described here aer based on the laws of the state of Oregon. If you live in a different state, different amounts may apply.
Most bankruptcy cases under Chapter 7 of the Code are "no-asset" cases - the client owns only exempt property, so the Trustee takes nothing. If you want to know whether specific items of property will be exempt, you should consult with an attorney.
Certain debts cannot normally be discharged in bankruptcy. The two most common are student loans, and domestic support obligations like child support and spousal support. These obligations can be discharged only in very rare circumstances, and you must engage in an adversary proceeding with the creditors, to show you would suffer an extreme and unusual hardship if the debts are not discharged. This is a very difficult standard to meet. These debts should be managed in other ways.
Once the trustee has disposed of any non-exempt assets, the debtor receives a discharge order, confirming that all their debts are discharged and no longer owed. You must take another credit counseling class after the meeting of creditors and before the discharge. You can file for bankruptcy only once every eight years.
Bankruptcy is not, as many people think, a sign of personal failure, or an end to your financial life. It is "the safety valve of capitalism" - an essential part of our economic system. The majority of bankruptcies in America today arise from unexpected medical debt and divorces. Bankruptcy can be the key to keeping your financial integrity and home intact. If you cannot manage your debt, you should consult with a bankruptcy attorney.