For individuals who have reached a point of financial insolvency and have no other options other than bankruptcy, there are two types of bankruptcy proceedings available. The first is a total liquidation under Chapter 7, in which all of the individual's qualifying assets are sold to repay past debt. The other option is a Chapter 13 bankruptcy which is a reorganization plan rather than a liquidation. Under Chapter 13, individuals retain ownership of their assets in exchange for paying off creditors according to a plan approved by a court. A basic outline of the process for filing Chapter 13 bankruptcy is as follows:
- deciding on legal representation.
- filing bankruptcy petition and plan.
- meeting with creditors.
- seeking a court approval.
Deciding on a Legal Representation
It is completely legal for an individual to represent himself in a Chapter 13 bankruptcy proceeding. However, just because it's legal doesn't make it a good idea. Bankruptcy laws can be very complicated, especially in a reorganization scenario, and you risk an unfavorable discharge if you do not do everything according to the letter of the law. Most people will work with an attorney and a financial planner in order to avoid such mistakes.
When choosing your bankruptcy attorney you should look for an individual or firm with a long history of successful bankruptcy proceedings. Such attorneys are common enough that you should be able to find one with a reasonable distance of where you live. That said, the closer you and your attorney are to one another the easier it will be to communicate, share information, and get all the paperwork signed. Although a financial advisor is not absolutely necessary to the process, he certainly can add valuable insight in how to reorganize your finances.
File Your Petition
In order to begin a bankruptcy proceeding within the legal system, a formal bankruptcy petition must be filed with the federal bankruptcy court that has jurisdiction in your area. With that filing you will submit to the court all of the required paperwork as well as payment for all associated fees. You may also file your reorganization plan at this time. If it's not ready, you and your attorney will be given a specified amount of time to prepare and submit it. Whatever you do, don't be late with the reorganization plan or you risk having your case unfavorably discharged.
Meeting with Creditors
Unlike a Chapter 7 liquidation, a Chapter 13 reorganization requires that the debtor attend a meeting with his creditors where the reorganization plan will be reviewed. Creditors do not get to vote on the plan, but they may raise objections if they believe the plan does not comply with Chapter 13 bankruptcy laws or they believe they would receive more compensation through a Chapter 7 liquidation. In most cases, creditor objections will cause a court to order the individual to restructure the plan in a way that sufficiently answers the objections.
Seeking Court Approval
After meeting with your creditors your financial reorganization plan is then submitted to a bankruptcy judge who will review it in relation to the personal information you supplied. The judge is looking for evidence that you have sufficient disposable income to follow through with your plan. He's also looking to make sure your creditors will receive more money under the reorganization than they would under a liquidation. If all conditions are met the judge will approve the plan and you will be protected from further collection attempts on any debts covered under the bankruptcy.
The court will also appoint a trustee to act as a middleman between you and your creditors. Rather than sending checks directly to those you owe, you send the money to your trustee who then disburses it among the various creditors. It is up to the trustee to make sure all funds are disbursed according to the court approved plan. It is also the trustee's responsibility to report back to the court any changes in your financial circumstances which may affect the reorganization plan. At the completion of a 3 to 5 year window you should receive a favorable discharge as long as you've met all the requirements of your plan.