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Filing for Bankruptcy – Everything You Need to Know

Reading this article will help you have the head start you need – and the probability that you can be more fully prepared – should you ever need to file for bankruptcy.

MOST COMMON TERMS

Bankruptcy – a federal law that allows individuals, married couples, and businesses to eliminate or restructure their debts when they have financial difficulties.

Chapter 7 – Also known as a liquidation or a “straight bankruptcy”, which gives an individual, married couple, and businesses a financial fresh start by discharging certain debts.

Chapter 13 – Also known as a reorganization. This Chapter is available to those with a steady income, this allows the debtor(s) to form a repayment plan with the creditors over an extended period of time. In most cases, this also allows you to maintain possession of all of your belongings which may not always happen in a Chapter 7 bankruptcy.

Voluntary Petition – a document that is filed with the courts to begin a Bankruptcy proceeding.

Automatic Stay – suspends all activities of creditors. Creditors cannot take any action against the debtor without court approval. Repeat filings may decrease or eliminate the automatic stay so always get legal advice on what is best for you and your situation.

Credit Counseling – a pre-filing required course to kick off the bankruptcy process. It was designed to see if maybe an alternative to bankruptcy could be considered, but that very rarely happens. The certificate of completion is valid for 180 days

Debtor Education/Financial Management Course – a post-filing required personal finance and budgeting course that takes approximately two hours to complete. Upon completion you receive a certification proving that you completed the course which needs to be filed with the bankruptcy court within sixty (60) days of the meeting of creditors. The bankruptcy court will not grant you a discharge of your debts if this certificate is not filed.

341 Meeting/Meeting of Creditors – a meeting between the debtor and the trustee to verify the accuracy of the information provided in the Bankruptcy petition.

Automatic Stay – An injunction/court order that automatically stays or stops most civil lawsuits filed against you and most collection actions being taken against your property by a creditor, collection agency, or government entity the moment a bankruptcy petition is filed. I have always liked to simplify it as a creditor is required to ‘automatically stay away’.

MOST COMMON DEFINITIONS

Debtor – is a person who owes payment for goods received or services rendered.

Debt – is any obligation to pay for goods received or services rendered.

Creditor – a person or business to whom money is owed for goods or services provided.

Collateral – The property that can be taken by a secured creditor if the debtor fails to pay or perform as promised.

Debt Collector – is one who has been assigned the task of recovering payments due on a debt for a creditor.

Interim Trustee – is a court-appointed representative of the estate who presides at the meeting of creditors and administers the Chapter 7 or Chapter 13 bankruptcy case/estate. The trustee’s responsibilities include investigating the debtor’s financial affairs;
determining if there is property that could be sold or recovered for the benefit of creditors; selling or liquidating such property (Chapter 7); reviewing the plan and making a recommendation as it whether or not it should be approved (Chapter 13); and
distributing money to creditors.

Exempt Assets – are certain property that a debtor is allowed to retain possession of to help prevent financial ruin and help to enable a “fresh start”.

Proof of Income – includes 7 (seven) total months of paystubs from Debtor(s), starting from the date you pay your attorney in full and back, Statement of Income from Social Security (if applicable), Profit & Loss Statement (if self-employed), separated by month or Signed statement of no income.

Current Monthly Income – is the average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from everyone in the household.

Means Test – The Bankruptcy Code applies a “means test” to determine whether an individual debtor’s chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor’s aggregate current monthly income (see definition above) over 5 years is above the State’s Median for Family Size and Income. For example, a family size of 2 in Colorado cannot make an income over $88,178.00 after special exemptions have been applied based on IRS rules and regulations.

Preference Payment – is a payment made to a creditor in the 90-day period before a debtor files bankruptcy (or within one year if the creditor was an insider) that gives the creditor more than the creditor would normally receive in the debtor’s chapter 7 case. You are showing ‘preference’ to one creditor over another.

Reaffirmation Agreement – is a document that is filed with the courts typically to keep a secured debt, such as a house or vehicle) in order to repay an existing debt so that you can keep the collateral.

Discharge – Debtor(s) receiving a discharge eliminates most debt(s) that existed prior to the filing of bankruptcy. Creditors are forever prohibited from collecting or trying to collect the debts owed to them upon entry of discharge.

If done right, bankruptcy is an offensive move that stops creditors and changes lives. A good bankruptcy attorney will guide you through the process so your assets are protected and you get the financial fresh start you deserve.

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Stephanie
Randall

Chief Managing Partner

Colorado Springs

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