Step-by-Step Guide to Filing for Bankruptcy

Oct 14. 2020

The coronavirus pandemic has left millions of Americans struggling financially. Layoffs, reductions, furloughs, etc. mean people aren’t able to make payments on their homes, cars, utilities, and other necessities. In some cases, bankruptcy is inevitable – and often it is a better choice than paying for your bills with your retirement funds. Every case is unique, but in many cases, you can keep your retirement when you file for bankruptcy.

If you think you may want or need to file for bankruptcy, consult with a bankruptcy attorney before filing. You want to make sure it is in your best financial and legal interests to file bankruptcy and that the issues you’re facing will be addressed and/or solved by filing.

Please note that this article does not constitute legal advice, it is meant as a general guide for those considering filing bankruptcy. It is also important to note that in this article we will be addressing filing for Chapter 7 bankruptcy because it is the most common form of bankruptcy filed by individuals. While there are many similarities between filing for a Chapter 7 bankruptcy and a Chapter 11 or Chapter 13 bankruptcy, they are not identical.

Step One: Analyzing Your Debt

It’s important to realize that filing bankruptcy is not a “get out of jail free” card. There are several types of debt that cannot be erased no matter which type of bankruptcy you file. In a Chapter 7 bankruptcy, you cannot discharge tax debt, child support, or most student loans. And if you used your house or car as collateral for a loan, the creditor will be able to seize your property if you are not current on payments when you file bankruptcy and if you do not remain current after your case.

So, if you are very behind on mortgage payments or car payments (and you doubt you’ll be able to become current before you file for bankruptcy) and one or both are collateral for any of your debts, filing for Chapter 7 bankruptcy may not be a good choice for you. Discuss it with a bankruptcy attorney to be sure.

Step Two: Determine Your Exemptions

Every state has its own property exemption laws. Exemption laws dictate which types of property or how much equity in that property you are entitled to keep in case of a Chapter 7 bankruptcy filing. Most states allow people to retain their household furnishings, a “modest” car (aka you will likely lose your Tesla or BMW), retirement accounts, and some equity in their home.

In Arkansas, you may choose the state or the federal property exemptions, but you may not pick and choose from both or combine them. The state of Arkansas provides exemptions for the following properties. Note that for specifics and requirements on each exemption, you will need to consult with a bankruptcy attorney. They should be up to date on the most recent laws and regulations.

  • Homestead
  • One motor vehicle up to $1,200
  • 60 days earned but unpaid wages (minimum $25/week)
  • Clothing
  • Personal property up to an aggregate of $200 or $500 depending on your family/marital status
  • Contributions to an IRA up to $20,000 made up to one year prior to filing

Step 3: Make Sure You Are Eligible

Before your filing is approved and your debt is discharged, you must take and pass the means test. This excludes some individuals with primarily business debt and some military personnel. If your average gross income is more than the median income for a family of your size in the state of Arkansas during the six months before you file, you qualify. If not, you will subtract all allowed expenses from your income to determine if you qualify for Chapter 7 bankruptcy.

Step 4: Redeem or Reaffirm Secured Debts

If you put any of your property up as collateral for a debt, you will have to continue to pay the creditor to keep it from being seized. When you file, you will choose whether you want to “redeem” or “reaffirm” your secured debts. Redeeming means that you pay the creditor the current replacement value of your property in a lump sum. Reaffirming means that you will agree to continue paying the debt per contract and usually under the same terms.

You can also “surrender” your property. This means you let the creditors seize your property and your debt is fulfilled in return. Some creditors have their own payment options and every state is a little different, so always check with a bankruptcy attorney and have them help you renegotiate where possible and make the right decisions for you financially otherwise.

Step 5: Take Your Credit Counseling Course

You are required to take a credit counseling course as a part of filing for Chapter 7 bankruptcy. Some states require that you take it before and a few require that you take it after filing.

Step 6: Fill Out the Bankruptcy Paperwork

Chapter 7 forms consist of several dozen pages in which you detail your debts, your assets, your income, and your expenses. You will need to list all of your creditors, property, exemptions, and income and what you’ll be doing about each individual secured debt. You will also need to disclose all property transactions from the last ten years. Your bankruptcy attorney will help you fill out your forms correctly.

Step 7: File for Bankruptcy

Once your paperwork is correctly filled out and your attorney has approved it, you will file your petition. Most people file everything at once, but in some emergency cases, you may be allowed to use the emergency filing option by submitting a few required forms and adding the rest later (they must be completed within 14 days to be considered valid).

When you file, you will need to pay the filing fee or request a waiver if you cannot afford it. Sometimes the court will allow you to split the fee into four smaller payments and sometimes it may be waived completely. Your household income must be equal to or less than 150% of the federal poverty guideline to have the fee waived completely.

There will be several steps to complete your bankruptcy and discharge your debt if it is approved, but these are the general steps to filing for Chapter 7 bankruptcy. If you have any questions or you are considering filing for bankruptcy in Arkansas, contact the Davidson Law Firm . We’re happy to go over your case and help you decide what your best option is legally and financially.

As an LLC or corporation, you (as the owner) are not personally liable for company debts or lawsuits. Unless you sign a document such as contract in your name instead of the business.

Choose an accountant and accounting software carefully.

Ensuring your business thrives is a concern for any business owner. Choose an accountant who is familiar with business tax issues. One of the areas that frequently causes business owners issues is calculating self-employment and/or payroll taxes correctly. Mistakes in this area can be very costly in terms of IRS penalties and attorney fees.

Do not sign away your protection

As an LLC or corporation, you (as the owner) are not personally liable for company debts or lawsuits. Unless you sign a document such as contract in your name instead of the business. When acting as the owner for your business, sign as your business, e.g., John Milton, CEO of Hotter than Hades HVAC, LLC. This demonstrates your inten to bind the business, rather than yourself. If the contract said John Milton, instead of John Milton, CEO of Hotter than Hades HVAC, LLC, the CEO may be personally liable instead of Hotter than Hades, LLC.

Seek legal counsel when needed

If you run into a situation such as a lawsuit is filed against the business, an employee is injured, or a contract dispute arises, seek the advice of an attorney familiar with business litigation issues.