Bankruptcy is a federal court process whereby individuals and businesses are able to reduce or eliminate their unsecured debt. Unsecured debt means money that is owed to a creditor where if it is not repaid as agreed, the creditor is legally able recover a piece of property called the security. The most common examples of a security is a person’s home or vehicle. The most common unsecured debts individuals seek relief from are credit cards, health care related expenses, and court judgments often times stemming from the lack of no fault automobile coverage.

For individuals, there are two general types of Bankruptcy, Chapter 7 and Chapter 13. The chapters are from the United States Bankruptcy Code. Chapter seven is designed to eliminate all of a person’s unsecured debt and is generally the preferred option provided that you qualify. The main qualifications are a person’s income and their net worth. In order to qualify for a chapter 7 bankruptcy a person cannot exceed 20k of income in the six months preceding the filing of the case, or bankruptcy petition. All persons that do not qualify for chapter 7 must qualify for chapter 13 if they wish to use the bankruptcy procedures. A Chapter 13 bankruptcy requires the preparation of a three to five year plan under which a portion of a person’s debt is repaid to his creditors. Depending upon a person’s income and the amount and character of their debt, the portion that gets repaid could range from 5% to 75%. To qualify for chapter 13, a person must have a regular consistent, income. Once the payments have begun and the court has approved the repayment plan, a person will have a fixed amount of discretionary income to use as he wishes and the rest shall be used to pay the creditors. Exceptions can and will be made by the court for financial emergencies and unexpected events.

The timeline for a chapter 7 is about four months from the time the petition is filed with the Court and the time that the debts are permanently discharged. After the case is filed, the Court assigns the case to a bankruptcy trustee. The trustee’s duty is to ensure that the case is filed properly and within the law. About one month after the petition is filed, a meeting with a representative of the court’s bankruptcy trustee is scheduled to ensure that the petition is accurate and proper.

A person filing chapter seven must complete two credit counseling education classes that are offered online or over the phone. Each class takes about 45 minutes to an hour to complete.

Immediately upon filing any bankruptcy petition the court grants an automatic stay which freezes all collection efforts and opportunities by all creditors. That means phone calls, garnishments, letters, and any other communication or attempt to collect any debt must stop. The bankruptcy court can and will punish those creditors who violate the automatic stay.

After the petition is filed a meeting will be set to discuss the case with a representative of the trustee. This meeting is called a 341 meeting of creditors. It is generally scheduled about 45 days of the petition is filed. Your attorney will accompany you to this meeting and help you answer any questions. The hearing is brief, usually about 10 minutes and the procedure is easy. This meeting is held in a conference room, not a court room, on the 9th floor at 200 West Congress in Detroit. It is a very general and simple process. The questions typically asked of the filer by the trustee representative include:

    1.       Questions about any real property owned

    2.       Questions about income earned,

    3.       Questions verifying that your attorney went over the petition and its accuracy.