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Understanding the bankruptcy process

While bankruptcy can affect future credit reports, it can also offer a fresh start if you're dealing with overwhelming debt. Discover the differences between chapter 7 and 13 bankruptcy and learn when you should consider legal help for a bankruptcy case.

Chapter 7 vs. chapter 13 bankruptcy

The two most common individual bankruptcy procedures are chapter 7 and chapter 13. Each has its own set of requirements and benefits.

A chapter 7 bankruptcy:

  • Is a "liquidation bankruptcy," since you’ll need to sell (liquidate) your assets to repay creditors as much as possible

  • Takes about 3 to 4 months for a discharge, meaning your debt is eliminated

  • Requires a means test if your income is above the median for your state

  • Allows you to keep exempt property—such as personal belongings, clothes, furniture, and, usually, a personal vehicle (the personal vehicle exemption may not apply depending on the vehicle's value)

  • Doesn't allow you to arrange a repayment plan to prevent foreclosure or repossession of some property

  • Remains on your credit report for up to 10 years

A chapter 13 bankruptcy:

  • Is known as a "reorganization bankruptcy," since you can keep your property but have to stay current on a repayment plan

  • Takes roughly 3 to 5 years to complete

  • Is only available to individuals, not businesses

  • Allows you to prevent foreclosure and seizure of other assets through arranged payments to a bankruptcy trustee, an appointed, impartial third party

  • Remains on your credit report for up to 7 years

The chapter 7 bankruptcy process

If you decide on a chapter 7 bankruptcy, here are the steps to follow:

  • File a chapter 7 bankruptcy petition with the court. You'll need to complete some lengthy forms in order to do this. But if you need to file immediately, you can usually file a 2-page emergency petition and complete the rest of the packet within 2 weeks.

  • Pay the fees. You’ll pay a $245 filing fee, a $75 administrative fee, and a $15 trustee surcharge.

  • Attend the creditor meeting. With chapter 7, you'll likely only need to go to court once to meet with your creditors and the trustee. Your creditors might choose not to appear, but they can ask you questions if they do. If they don't attend, the trustee will review your case before approving it.

  • Handle your secured debts. If you want to keep property that’s attached to a loan (known as a secured debt), you’ll have to pay that creditor an amount of money to compensate. You'll need to make this payment before your debts are discharged.

  • Wait for the court to enter a discharge. A judge will issue an order verifying that all of your dischargeable debts are officially recognized.

The chapter 13 bankruptcy process

If you opt for a chapter 13 bankruptcy, here's what you'll need to do:

  • File a chapter 13 bankruptcy petition with the court.

  • Pay the fees. You'll pay a $235 filing fee and a $75 administrative fee. Once paid, your creditors are “stayed,” meaning they can't take actions to collect from you.

  • Provide the trustee with certain documents. You'll need to file a repayment plan with the court and release certain documents to your trustee, such as income tax returns.

  • Begin making payments under your repayment plan within 30 days of filing.

  • Attend the meeting of creditors. You, the trustee, and any of your creditors who wish to attend will meet. Your creditors may ask you questions and try to challenge your repayment plan.

  • The court approves your final repayment plan at a confirmation hearing.

  • Upon completion of your repayment plan, the court enters a discharge. If you fulfilled all the requirements of your plan, the court will grant you a discharge that confirms the plan requirements.

Handling a bankruptcy on your own vs. hiring an attorney

Whether or not handling a bankruptcy yourself is a good idea will depend on your case's complexity, the amount of time you have, and what you can afford. Bankruptcies aren't cheap to begin with, and they can become more expensive with attorney involvement.

While fees will vary by attorney and location, Texas family law attorney Florita Welsh estimates that a chapter 7 bankruptcy filed by an attorney will cost between $1,200 to $2,000. An attorney-handled chapter 13 bankruptcy will cost $3,000 to $3,500.

Remember that you will have to pay both court costs and attorney's fees. You may also have to pay for pre-bankruptcy credit counseling courses in some states. With chapter 13 bankruptcies, you will have to pay for a course in financial management before discharge.

However, hiring a bankruptcy attorney can offer the following benefits:

  • You won't have to complete multiple pages of required forms on your own.

  • Your lawyer can advocate for you with unreasonable creditors.

  • Your lawyer can attend court dates and meetings on your behalf to save you time.

  • You don't risk making a mistake in your petition, which may invalidate it or allow creditors to continue collecting money from you.

  • An attorney can identify exempt property and help you protect other property.

A bankruptcy will remain on your credit report for years, potentially affecting your employability and ability to qualify for loans. With much at stake, consulting an attorney before beginning the bankruptcy process may be worthwhile.

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