Bankruptcy Laws and Exemptions
While it is technically possible to successfully file for bankruptcy without an attorney, it is not recommended. Declaring bankruptcy is a highly bureaucratic process full of arcane rules and baffling forms. For instance, in a Chapter 7 case, in addition to the bankruptcy petition, the debtor must also file with the court [source: U.S. Courts]:
- schedules of assets and liabilities
- a schedule of current income and expenditures
- a statement of financial affairs
- a schedule of executory contracts and unexpired leases
- a certificate of credit counseling and a copy of any debt repayment plan agreed to through counseling
- copies of tax returns, plus other documents
If you miss a deadline or file the wrong form, your case could be dismissed. If you mess up badly enough, you could be tried for bankruptcy fraud. If you can't afford a bankruptcy lawyer, get help from a free legal clinic at a law school or nonprofit legal advocacy organization.
The bankruptcy process in America is governed by both federal and state law. Almost all of the rules, forms and deadlines are set by the Federal Rules of Bankruptcy Procedure, but each state has the right to set its own exemptions for Chapter 7 bankruptcy. For example, some states allow debtors to protect most of the equity in their home — called the homestead exemption — while other states offer no protections against losing a home. Other common exemptions are motor vehicles, personal belongings like jewelry and clothing, and retirement savings and pensions [source: Bulkat].
To further confuse things, there are also federal exemption rules, and some states allow you to choose between either the state or federal exemptions in a Chapter 7 bankruptcy. Did we mention you should hire a lawyer?
Bankruptcy laws don't solely exist to make your life difficult. They also establish important protections against aggressive creditors. Once you have filed for either Chapter 7 or 13 bankruptcy, your creditors are barred from trying to collecting on your debt or filing a lawsuits against you. One of the advantages of Chapter 13 bankruptcy is that even if you've missed mortgage payments and your home is in foreclosure, you get an automatic stay. As part of the repayment plan, you can make up for missed payments and save your house.
For lots more information about debt management, debt relief and staying out of the red, check out the related HowStuffWorks articles below.
Author's Note: How to Declare Bankruptcy
About 2,500 people and businesses declare bankruptcy each day in America. Last year, that added up to nearly 1 million people who became so overwhelmed by debt that they were willing to put a black mark on their credit reports for a decade in exchange for a fresh start. My heart goes out to families who suffer through a financial calamity that leads to foreclosure or bankruptcy. I'm grateful to know that in cities throughout the country, there are free legal aid organizations in which bankruptcy lawyers provide pro bono services to low-income community members. Lawyers get a bad rap, but I've personally known several attorneys who volunteer a significant amount of their time to helping folks navigate the legal bureaucracy and get their lives back in order.
- Bulkat, Baran. "California Bankruptcy Exemptions." Nolo (Sept. 26, 2014) http://www.nolo.com/legal-encyclopedia/california-bankruptcy-exemptions-property-assets.html
- Federal Trade Commission. "Debt Collection" (Sept. 26, 2014) http://www.consumer.ftc.gov/articles/0149-debt-collection
- FICO. "Chapter 7 & 13: How long will negative information remain on my credit report?" (Sept. 26, 2014) http://www.myfico.com/crediteducation/questions/negative-items-on-credit-report-chapter-7-13.aspx
- Maidman, Bret. A. "Chapter 11 Bankruptcy: An Overview." Nolo (Sept. 26, 2014) http://www.nolo.com/legal-encyclopedia/chapter-11-bankruptcy-overview.html
- New York Fed. "New York Fed Report Shows Rises in Auto Loan Origination and Balances." Aug. 14, 2014 (Sept. 26, 2014) http://www.newyorkfed.org/newsevents/news/research/2014/an140814.html
- Nolo. "Alternatives to Bankruptcy" (Sept. 26, 2014) http://www.nolo.com/legal-encyclopedia/bankruptcy-alternatives-30011.html
- U.S. Courts. "Bankruptcy Basics, Part 4: Filing for Bankruptcy" (Sept. 26, 2014) http://www.uscourts.gov/Multimedia/Videos.aspx?video_url=http://www.uscourts.gov/video/source/BankruptcyBasics/bankruptcy-eng_4-filing_low.f4v&video_image=/uscourts/video/BankruptcyBasics/images/preview4.jpg&video_id=bb4
- U.S. Courts. "Individual Debt Adjustment" (Sept. 26, 2014) http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx
- U.S. Courts. "Liquidation Under the Bankruptcy Code" (Sept. 26, 2014) http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx
- U.S. Courts. "Table F-2: U.S. Bankruptcy Courts — Business and Nonbusiness Cases Commenced, by Chapter of the Bankruptcy Code, During the 12-month Period Ending June 30, 2014" (Sept. 26, 2014) http://www.uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2014/0614_f2.pdf