How to Prepare for Bankruptcy

Bankruptcy is a major legal decision which can have long-lasting effects on your income, your property, your loan eligibility, and your business.  Chapter 7 takes at least several months to complete, while Chapter 13 can take as long as five years.  It’s a financially complex process, so the better you prepare before committing, the smoother your path toward receiving a discharge will be.  In this blog post, our New Jersey bankruptcy attorneys explain how to prepare for bankruptcy with six simple but helpful tips.

Talk to a Lawyer

We know what you’re thinking: you’re lawyers, so of course you would tell me to talk to a lawyer!

After all, you might think, I can save money by doing it myself.  And you would be partially correct: you can file for bankruptcy yourself.  This is called making a pro se filing.  There is no law which says that debtors must retain a Pennsylvania bankruptcy lawyer before they file, and you can find plenty of forms online to help you file solo.

But while you’re technically entitled to self-representation, you truly do need to approach bankruptcy with professional help — and that’s not just our opinion.  It’s the stance of the federal bankruptcy court system itself.  The United States Courts’ website issues the following warnings to would-be pro se filers:

While individuals can file a bankruptcy case without an attorney or “pro se,” it is extremely difficult to do it successfully…  Bankruptcy has long-term financial and legal consequences — hiring a competent attorney is strongly recommended.

That bolding is not our emphasis — it’s preserved from the original text.

A few more words of warning from the federal government:

• “Individual bankruptcy cases are randomly audited to determine the accuracy, truthfulness, and completeness of the information that the debtor is required to provide.  Please be aware that bankruptcy fraud is a crime.”

• “Pro se litigants should be familiar with the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the local rules of the court in which the case is filed.”

For reference, Chapter 7 of the United States Bankruptcy Code alone is broken down into five subchapters, four of which are further broken down into at least seven more sections.  Then, you have to consider over 100 Federal Rules of Bankruptcy Procedure — and that doesn’t even begin to take local court rules into consideration.

Consider Transferring Bank Account Funds

As we warned about in our post about banking with credit unions, you may find yourself facing something called bank setoffs (also called offsets).  What are setoffs, and why are they a problem for debtors?

Essentially, financial institutions have the right to freeze money in your account if you fall behind on debts you owe to that institution, referred to as setoff rights.  Therefore, if you’re thinking about filing and know you are behind on your payments, it may be a good idea to consider moving your money from the bank you owe to another bank which you owe nothing.  An experienced bankruptcy lawyer can help you evaluate your legal options — unless you decide to file on a pro se basis, of course.  Then you’re on your own.

Cancel Automatic Payments

An injunction called the automatic stay grants debtors strong protection from creditors, providing that collection actions against debtors who are filing for bankruptcy are supposed to cease immediately.  In other words, creditors can no longer contact you asking for payments unless a collection is already underway, such as the process of foreclosure.  (If you think you’ve been a victim of creditor harassment, which is strictly prohibited by law, you have a few different options regarding how to proceed.)

If you have an auto-pay system set up with a creditor, he or she should cancel the automatic deductions — but sometimes things fall through the cracks, especially when they’re automated instead of being handled by a human on a per-transaction basis.

Don’t rely on your creditors to take the initiative for you.  Be proactive and shut off automatic payments yourself prior to filing.  You certainly don’t want a surprise auto-deduction to unexpectedly interfere with your repayment obligations, especially since you’ll also have to…

Budget, Budget, Budget

When you file for bankruptcy, you still have to make reasonable efforts to pay back your creditors at least a portion of what was owed.  In Chapter 7, this amounts to the bankruptcy trustee selling off your non-exempt properties and assets, which is why Chapter 7 is sometimes called liquidation.  In Chapter 13, you can avoid liquidation — but in exchange, you create a three- to five-year repayment plan which siphons all of your disposable income toward repayments.

The bottom line is that you need to prepare for reductions to your spending budget.  Brainstorm a list of the areas where you think you can save money.  Maybe you can start cooking at home instead going out to eat. Maybe you can sell that fancy appliance you never really use, or the second car you seldom drive.  Maybe you can start taking the bus to work instead of a cab.  The ways you can save depend on the sort of lifestyle you’re used to.

When you budget, make sure to place your priority payments first.  Necessities like bills and groceries should always take precedence over luxuries.  Remember, even tiny luxuries like coffees and candy bars can really add up over time.

Assemble Your Paperwork

Bankruptcy involves lots of paperwork.  In addition to the voluntary petition, you also need to file a series of alphabetically designated “Schedules” (Schedule A, Schedule B, etc.) which are used to provide an overview of your finances.  Some Schedules are used to itemize your assets, while others list your creditors, and others still are used to break down your average monthly expenses.  In addition to the petition and numerous schedules, you also have to file the Statistical Summary, the Certificate of Credit Counseling, the Statement of Financial Affairs, and the Creditor Matrix.

As you can probably guess, bankruptcy involves a lot of number-crunching and accounting work.  If you make a genuine mistake, you’ll have to go through the process of filing an amendment and working it out with the trustee.  If you make a deliberate “mistake,” such as understating or concealing assets, you could find yourself under investigation for criminal fraud.

In short, you need to have your financial information ready — and it needs to be accurate.  Therefore, you should assemble as many documents and records as you can before you file, including but not limited to property titles, deeds of trust, insurance records, vehicle registration papers, notices of default, tax returns, promissory notes, pay stubs, bank statements, utility bills, credit card bills, and retirement account information.

You’ll also need valid identification, so be sure to gather up your passport, social security card, driver’s license, and/or state ID.

Go to Credit Counseling

This one is cheating a little, because it’s more than just a tip — it’s a requirement.  In accordance with federal law, it is mandatory to go through a course of credit counseling prior to filing.  This counseling must be received through a Department of Justice-approved agency, or it will not count toward satisfying the credit counseling requirement.

Fortunately, the DOJ provides a full list of approved agencies to make things easier for debtors.  Simply select your state from the drop-down menu to get started.  The reason the credit counseling requirement exists is to help people who are struggling financially identify possible alternatives to bankruptcy.

While you certainly have the option to attend credit counseling in person, it’s probably possible to fulfill the requirements online or over the phone if traveling is not an option.  Most agencies offer services in both English and Spanish, and some also offer language options like French, Chinese, Japanese, German, Russian, Hindi, and Vietnamese.

Contact Our Bankruptcy Attorneys

If you think you’re ready to start the process of filing for Chapter 13 or Chapter 7, remember our very first tip: don’t go it alone!  Our legal team is here to help you.  At Young, Marr, Mallis & Associates, our attorneys have more than 20 years of experience filing over 5,000 cases, and serve a wide range of communities through Pennsylvania and New Jersey.

To start discussing your situation in a free and confidential legal consultation, call our Philadelphia bankruptcy attorneys at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania today.