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Preparation: An Essential Component of Bankruptcy

Bankruptcy Law Concept

You may find yourself in bankruptcy court because you relied too heavily on credit cards and spent more money than you had coming in each month. If that's the case, it's important to avoid making that same mistake again. Regardless of how you got to this point, you'll want to make a fresh start. Therefore, it helps to know how to prepare for bankruptcy and managing your finances moving forward.

Talk to a Bankruptcy Attorney

Although it's possible to file for bankruptcy without an attorney representing you, it generally isn't a good idea. A bankruptcy attorney can tell you if bankruptcy is the best choice for your situation. If it is, an attorney can help you decide whether to file Chapter 7 or Chapter 13 bankruptcy, depending on your income and the amount of equity in your property.

You also may need help completing the paperwork and understanding the exemption rules that protect certain assets. Handling creditors and determining which debts get wiped out at the end and which debts aren't discharged in bankruptcy are other issues with which a bankruptcy attorney can assist.

Decide Which Debts to Continue Paying

Even when you're having trouble making ends meet, you'll want to continue making payments on debts, such as your mortgage loan, auto loan payments, and any other credit obligations secured by collateral. If your finances get so bad that you can't pay all your bills before you file for bankruptcy, it's better to let nonpriority unsecured debts like credit card bills slide.

Bankruptcy won't necessarily forgive all your unsecured debt, but the court may discharge some of it. Following discharge, a creditor is no longer allowed to collect on the debt but may want to verify the bankruptcy and that the debt was discharged. In that case, you need to provide the bankruptcy case number, filing date, and discharge date.

Chapter 7, or liquidation bankruptcy, normally leaves little, if any, money for unsecured creditors after secured creditors are paid. Any proceeds left over, which then are paid to unsecured creditors, are distributed according to priority. For example, past due child and/or spousal support or back taxes you owe are paid first.

Unsecured debts, except for those that can't be discharged, are wiped out at the end of your bankruptcy case. Student loans, alimony, child support payments, and divorce settlements are examples of nondischargeable debts. In Chapter 13 bankruptcy, the court may also discharge the balance of any nonpriority unsecured debt remaining at the end of the repayment period.


Plan Your Financial Recovery

When you go to open a new checking account after bankruptcy, look for a bank that offers "no fee" checking accounts if you agree to have your paycheck directly deposited. Some banks also waive the monthly maintenance fee if you choose direct deposit or keep a minimum balance-an option that helps you cut costs and save money. 

Plan to open a savings account once your bankruptcy is discharged. The key is to save regularly even if you can only put aside a small amount in savings each payday. If you don't trust that you will make regular deposits, request that your bank automatically deduct a certain amount from your checking account each month and deposit it into your savings account.

Help rebuild your credit by purchasing a secured credit card. When you open the account, you are required to submit a refundable security deposit. The line of credit you receive usually is equal to the amount of the deposit.

You improve your credit score by making on-time payments on charges you incur. If you default on your payments, you forfeit the security deposit-incentive to keep you paying on time.

When looking for an attorney to help you maneuver through the bankruptcy process, Mary E. Papcke, Attorney at Law can assist you in planning for your bankruptcy in advance so that you know what to expect.

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