How to Prepare for Bankruptcy
Bankruptcy is often seen as a last resort, but it can also offer a path toward financial recovery for individuals and businesses.
If you're facing overwhelming debt, understanding the process and steps involved in preparing for bankruptcy is crucial. The path to financial relief can be smoother if you're fully informed and prepared.
Webb & Associates in Houston, Texas, helps clients with how to prepare for bankruptcy and provides practical advice to help you manage the process with greater ease.
The Types of Bankruptcy in Texas
Before diving into preparations, it's important to grasp the different types of bankruptcy available. In the U.S., the most common forms of bankruptcy for individuals are Chapter 7 and Chapter 13. Each has distinct features, and the type you file for will affect the way you prepare.
Chapter 7 Bankruptcy
Chapter 7 is also known as "liquidation" bankruptcy. This type of bankruptcy involves the liquidation of non-exempt assets to pay off creditors. Once the assets are sold and the proceeds are distributed, most remaining unsecured debts—like credit card bills or medical bills—are discharged.
Who it’s for: Individuals with little or no disposable income who can’t afford to repay their debts.
Process: After filing, the court appoints a trustee who oversees the liquidation of assets. However, Texas has generous exemptions that may protect many assets, such as your home or personal property.
Timeframe: The process typically takes about 3-6 months to complete.
Chapter 13 Bankruptcy
Chapter 13, known as "reorganization" bankruptcy, allows individuals to restructure their debt into a manageable payment plan. Instead of liquidating assets, you’ll propose a repayment plan that lasts 3 to 5 years, during which you make monthly payments to creditors.
Who it’s for: Individuals with regular income who are behind on mortgage payments or other secured debts but still have the ability to pay.
Process: The court approves your repayment plan, and you’ll make monthly payments to the bankruptcy trustee, who then distributes the funds to creditors.
Timeframe: The process can last anywhere from 3 to 5 years, depending on the repayment plan.
Choosing the Right Type of Bankruptcy
In Texas, the choice between Chapter 7 and Chapter 13 will depend on your financial situation. If your income is too high to qualify for Chapter 7, Chapter 13 may be your best option.
You’ll also need to consider your assets, as Chapter 7 could require the liquidation of non-exempt property, whereas Chapter 13 allows you to keep your property as long as you adhere to the repayment plan.
It’s important to assess your income, assets, and long-term financial goals before making a decision. Speaking with a bankruptcy attorney can help you make a more informed choice based on your circumstances.
Gathering Financial Information
Once you've decided on the type of bankruptcy to file for, the next step is to gather all necessary financial documents. Bankruptcy filings require a detailed overview of your financial situation, including income, expenses, assets, liabilities, and recent transactions. You’ll need to have several key documents on hand such as:
Income: Pay stubs, tax returns, and other proof of income for the past 6 months.
Assets: A list of your properties, including real estate, vehicles, bank accounts, and personal belongings.
Debts: A comprehensive list of all outstanding debts, including credit cards, medical bills, personal loans, student loans, and mortgages.
Expenses: Monthly living expenses such as rent or mortgage payments, utilities, food, and transportation.
Recent transactions: A record of any significant financial transactions, including large purchases or transfers of property, made in the past 2 years.
The information you provide will be used to complete your bankruptcy petition and schedules, so it's essential to gather everything thoroughly. Failing to disclose assets or debts can result in delays or the dismissal of your bankruptcy case.
Credit Counseling and Debtor Education
Before filing for bankruptcy, federal law requires you to complete credit counseling from an approved agency. This step is mandatory for both Chapter 7 and Chapter 13 filers.
Credit Counseling
The purpose of credit counseling is to determine if there are other viable options to address your debt outside of bankruptcy. During the counseling session, you’ll discuss your financial situation, and the counselor will help you explore alternative solutions, such as debt management plans.
The counseling session typically lasts about an hour and can be completed online, over the phone, or in person. It’s important to choose a reputable, approved agency to make sure the counseling session counts toward your filing requirements.
Debtor Education
After your bankruptcy case is filed, you’ll also need to complete a debtor education course before your debts can be discharged. The goal of this education is to provide you with financial literacy and strategies to avoid future financial difficulties.
This course usually takes about 2 hours and can be completed online or over the phone. Both credit counseling and debtor education are relatively simple steps, but failing to complete them will delay or even prevent your bankruptcy from being approved.
Exemptions in Texas Bankruptcy
Texas offers a number of exemptions that allow filers to protect their property during bankruptcy. Understanding these exemptions is crucial when preparing for bankruptcy, as they determine what property you can keep. Some common exemptions under Texas law include:
Homestead exemption: Texas provides a generous homestead exemption, allowing you to protect the full value of your primary residence, as long as it’s not over a certain size (10 acres inside a city or 100 acres outside of a city).
Personal property: Exemptions apply to certain personal belongings, including clothing, household goods, and vehicles up to a certain value.
Retirement accounts: Retirement savings such as 401(k)s, IRAs, and pensions are generally protected in bankruptcy.
Tools of trade: Tools, books, and equipment needed for your profession may also be exempt, as long as their value is reasonable.
Wages: Texas also protects a significant portion of wages from garnishment, so your earnings are largely shielded from creditors.
It’s important to be aware that certain assets, like investment properties, second homes, and luxury items, may not be fully exempt and could be subject to liquidation. Understanding how exemptions work in Texas can help you preserve your most important assets.
Filing the Bankruptcy Petition
After gathering all your financial documents and completing the necessary counseling courses, it’s time to file your bankruptcy petition. This is the formal request to the court to initiate the bankruptcy process.
The petition includes detailed information about your financial situation, including all debts, income, assets, and expenses. You’ll also file a series of schedules that break down your financial details in greater depth.
There are fees associated with filing for bankruptcy. For Chapter 7, the fee is typically around $338, and for Chapter 13, it’s about $313. If you cannot afford the fee, you may be eligible for a fee waiver or installment payments.
Once you file your petition, an automatic stay goes into effect. This means that creditors are no longer allowed to pursue collection actions against you, such as wage garnishment, foreclosure, or lawsuits.
At this point, your case is officially in the hands of the court. A bankruptcy trustee will be assigned to oversee the case and make sure that the process runs smoothly.
Meeting With Creditors and Trustees
After filing, you’ll attend a meeting with the bankruptcy trustee, known as the 341 meeting. This is an informal hearing where the trustee and creditors (if they choose to attend) will ask you questions about your financial situation. Here are a few things you can expect to occur at this meeting:
Questions about your finances: Be prepared to discuss your debts, assets, income, and the bankruptcy process.
Trustee’s role: The trustee will review your financial documents and may ask for additional information or clarification.
Creditor involvement: While creditors may attend, they rarely appear at the meeting. Their role is typically to ask questions about your bankruptcy petition if they have concerns.
It’s important to attend this meeting and be truthful in your responses. Failing to attend or providing false information could lead to complications in your case.
Final Discharge and Financial Recovery
The final step in the bankruptcy process is the discharge of your debts. For Chapter 7 filers, this occurs about 3 to 6 months after filing. For Chapter 13 filers, the discharge occurs once the repayment plan is completed.
For Chapter 17, after the trustee liquidates your non-exempt assets, remaining eligible debts are discharged. This means you’re no longer legally obligated to pay them. For Chapter 13 discharge, after successfully completing the repayment plan, the remaining unsecured debts may be discharged.
After discharge, you’ll be free from the burden of your previous debts, allowing you to start fresh. However, the bankruptcy will remain on your credit report for several years, which may impact your ability to obtain new credit. With careful financial management, though, you can begin rebuilding your credit and improving your financial health.
Schedule a Consultation at Our Firm
Our firm is located in Houston, Texas, and serves clients throughout the surrounding areas including Harris County, Sugar Land, Katy, Galveston County, Cypress, Fort Bend County, Waller County, and Brazoria County. Reach out to Webb & Associates today to learn more about preparing for bankruptcy.