What to Do Before Filing for Bankruptcy

Bankruptcy is a legal process designed to provide individuals with relief from debts they are unable to repay. It offers a structured path to a financial fresh start by liquidating certain assets to pay creditors or by establishing a repayment plan. Navigating bankruptcy requires careful preparation and understanding the steps involved before filing. Taking proactive measures is important for making informed decisions and adequately preparing for the process.

Assessing Your Financial Landscape

A comprehensive assessment of your financial situation is a necessary first step. This involves detailing all sources of income, recurring expenses, and outstanding debts. Compiling this information provides a clear picture of your current financial standing.

Begin by creating a thorough list of your income, including wages, salaries, benefits, and other regular financial inflows. Concurrently, itemize all your monthly expenses, such as housing costs, utility bills, food, transportation, insurance premiums, and loan payments. This helps in understanding your disposable income, which is the money remaining after essential expenses are covered.

Next, compile a complete record of all your debts. Categorize these debts as either secured or unsecured. Secured debts are backed by collateral, such as a home mortgage or a car loan. Unsecured debts are not tied to any specific asset, and common examples include credit card balances, medical bills, and personal loans. For each debt, record the creditor’s name, the outstanding balance, the interest rate, and the minimum monthly payment.

Finally, create an inventory of all your assets. This includes real estate, vehicles, bank accounts, investment portfolios, and retirement accounts. Personal property such as jewelry, art, and electronics should also be listed. Consider the distinction between exempt and non-exempt assets. Exempt assets are protected under bankruptcy law and cannot be sold to pay creditors, while non-exempt assets may be liquidated.

Understanding Bankruptcy Options

Understanding the primary types of consumer bankruptcy, Chapter 7 and Chapter 13, is important for making an informed decision. Each chapter operates under different principles regarding debt discharge and asset retention.

Chapter 7 bankruptcy, often called “liquidation,” involves the potential sale of non-exempt assets to repay creditors. This type of bankruptcy discharges most unsecured debts. Eligibility for Chapter 7 is determined by a “means test,” which assesses whether a debtor’s income is low enough to qualify. If a debtor’s income exceeds a certain threshold, they may not be eligible for Chapter 7.

Chapter 13 bankruptcy, known as a “reorganization” or “wage earner’s plan,” allows individuals with a regular income to repay all or a portion of their debts through a court-approved payment plan. This plan typically spans three to five years, during which the debtor makes consistent payments to a trustee who then distributes funds to creditors. An advantage of Chapter 13 is its ability to help debtors keep secured assets, such as a home facing foreclosure or a car facing repossession, by incorporating past-due payments into the repayment plan.

The means test determines the appropriate bankruptcy chapter. It evaluates a debtor’s ability to repay debts by comparing their income and expenses to established standards. If the means test indicates sufficient disposable income, debtors may be directed toward Chapter 13 rather than Chapter 7.

Preparing Essential Documentation

Gathering financial and legal documents is a preparatory step before filing for bankruptcy. These documents provide evidence of your financial situation and are required by the court and your legal counsel.

You will need bank statements for all checking and savings accounts, covering the past six to twelve months. Statements for investment accounts and retirement funds are also necessary to show current values. These statements provide a snapshot of your assets and financial activity.

Proof of income and tax history is also required. This includes recent pay stubs for the past 60 days, or profit and loss statements if self-employed. Copies of your federal and state income tax returns for the past two to four years are also required. These documents verify your earning capacity and tax compliance.

Obtain free credit reports from the major credit bureaus—Equifax, Experian, and TransUnion. These reports provide a comprehensive list of your debts and creditors. Additionally, collect all recent bills, collection notices, and statements from creditors for all outstanding debts.

Gather documentation related to your property and any legal matters. This includes deeds for real estate, titles for vehicles, and registration documents for other significant assets. Any relevant legal documents, such as court judgments, divorce decrees, or support orders, should also be compiled. Organizing these documents beforehand streamlines the bankruptcy process.

Seeking Professional Guidance

Seeking professional guidance involves consulting with approved credit counseling agencies and qualified bankruptcy attorneys. Their expertise helps in evaluating alternatives and navigating the legal process.

Federal law mandates that individuals complete pre-bankruptcy credit counseling from an approved agency within a specific timeframe before filing. This counseling explores alternatives to bankruptcy and helps individuals develop a budget. Participation is a requirement, and a certificate of completion must be filed with the court.

Consulting a qualified bankruptcy attorney is advised. An attorney can analyze your specific financial situation to determine your eligibility for Chapter 7 or Chapter 13. They can explain the implications of filing for your assets and debts, including which assets might be exempt and which debts are dischargeable. Attorneys also provide advice on the optimal timing for filing and can identify potential issues, such as recent large purchases or asset transfers, that could impact your case.

During an initial consultation, you can expect to discuss your financial history, current income, expenses, and debts. Bringing prepared documents will enable the attorney to provide a more accurate assessment. The attorney will guide you through the process, outline estimated costs, and address any questions about proceeding with a bankruptcy filing.