How to Claim Bankruptcy

Bankruptcy is a way of clearing one’s debts and starting again with a clean slate.

 
However, it is a last resort and has many effects that one needs to understand before proceeding. All the alternatives to bankruptcy should be investigated before taking such a drastic step.

Indeed, under the Bankruptcy Abuse Prevention and Consumer Protection Act 2005, within 180 days of filing bankruptcy an individual must undertake approved consumer credit counseling which is intended to make the individual aware of possible alternatives.

The first step in understanding how to claim bankruptcy is to decide which type of bankruptcy to file for.

The two most common types are Chapter 7 bankruptcy and Chapter 13 bankruptcy. A full explanation of each can be found elsewhere on this site, but simply, Chapter 7 is complete liquidation of assets and a fresh start financially, whilst Chapter 13 is essentially a repayment schedule.

Chapter 7 bankruptcy is often the preferred type of bankruptcy, as this offers a complete financial clean slate. However, this is now subject to means testing making it harder to file under Chapter 7 and forcing a Chapter 13 filing.

You should always hire a lawyer who will offer expert advice on which chapter is right for you and help you with the means test. Not hiring a lawyer is a false economy – it is vital that the correct chapter is chosen with proper legal advice.

The fee charged is sometimes based on a flat fee, sometimes on the amount of outstanding debt. Try and find a lawyer who charges a flat fee. In a Chapter 7 case the entire fee must be paid up front, in a Chapter 13 case the payment can be added to the repayment schedule and paid accordingly.

In addition, once a lawyer has filed, you are then protected from your creditors by what is called “automatic stay”. In other words, creditors cannot approach you directly for any payment, and have to deal directly with your lawyer.

A lawyer will then instruct you to prepare a list of your debt and of your assets. This is then scrutinized at what is called a “341 Meeting”, or a meeting of creditors where you are asked questions, under oath, to confirm the veracity of your financial position.

Following that, in a Chapter 7 filing, the court will decide what assets are to be sold to go towards payment of your debts, (consequently some debts may never be repaid if there is a shortfall in asset value, one of the main attractions of Chapter 7 bankruptcy), or in a Chapter 13 case, a 3 to 5 year repayment plan will be put into effect, giving consideration to the means test.

Under Chapter 7, the 60th day after the 341 meeting is the deadline for creditors to legally challenge the discharge of either a particular debt, or indeed the whole discharge.

If no such challenge is received, a discharge of debt is issued shortly after this time. This means that regardless of how much debt remains outstanding (which may still appear on your credit record), all debt is discharged, and you have no further obligations to any of your creditors.

In the case of a Chapter 13 case, notification is served 30 – 60 days after the final payment under the repayment plan has been made.

Be aware however, that certain debt such as unpaid government tax cannot be written off in this way, whatever bankruptcy chapter you have filed under.