The decision to file for bankruptcy is rarely an easy one. If you think you're likely to file, though, you need to take certain steps to make sure the process goes as smoothly as possible -- and that you don't wind up in worse shape than you are now.
That's because bankruptcy is a complex legal process, made more so by the Bankruptcy Reform Act of 2005. Even a small misstep could mess up your case and make relief more expensive or even impossible.
Here's your game plan:
1. Educate yourself about the process. MSN Money's bankruptcy guide has a wealth of articles, including "Your 5-minute guide to bankruptcy," to get you started. Basically, there are two types of consumer bankruptcies: Chapter 7 liquidation, which wipes out credit card and most other unsecured debt, and Chapter 13 reorganization, which allows you to keep more property but requires a five-year repayment plan.
Research what each chapter means and the process involved so you can discuss your situation more knowledgeably with your attorney (more on that in a moment).
2. If you haven't already, explore the alternatives. Bankruptcy is too drastic an option to be your first choice. If you have little income and no assets, for example, you may be "judgment-proof," which means creditors can't take meaningful action against you and that bankruptcy might be unnecessary. If you do have something to lose, however, you might want to consider negotiating with your creditors or exploring credit counseling or debt settlement. These three articles can give you the scoop:
3. Leave your retirement accounts alone. Using retirement money to pay down debt is usually a bad idea, but it's particularly bad if you think you may be headed to bankruptcy court. Money in 401(k)s, IRAs and other retirement accounts is typically protected from creditors, so you'd be using cash that could have been preserved to pay debts that would have been wiped out.
4. Make a list of what you owe. To get relief from your debts in bankruptcy, you typically need a complete list of your creditors (companies or people to whom you owe money) and how much you owe them.
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5. Pull your credit reports. These files will list debts you may have forgotten about as well as names and contact information for creditors and collection agencies. You can get free annual looks at your reports from the three major bureaus, Equifax, Experian and TransUnion. (Here's how to get them for free.)
6. Get your paperwork together. Bankruptcy requires a ton of paperwork, noted Henry Sommer, a past president of the National Association of Consumer Bankruptcy Attorneys. Here's a partial list of what you should bring to your attorney:
- 60 days' worth of pay stubs (you eventually may need to provide more to prove your income for the six months prior to filing).
- The last two months of bank statements.
- Tax returns for the previous two years.
- Statements for all brokerage and retirement accounts, including IRAs, Roth IRAs and 401(k)s.
- Your most recent bills.
- Any collection letters you've received or other correspondence about your debts.
- Any current loan contracts (for homes, cars, etc.).
- Any lease contracts (for apartments, cars, etc.).
- Any home appraisals or tax assessments related to your home or other real estate you own.
- Any paperwork related to past bankruptcies.
- Any legal papers you've received, including but not limited to lawsuits, judgments, wage garnishments, divorce decrees, court orders and child-support orders.
- Proof of your identity, such as a driver's license or Social Security card.
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7. Consult with an experienced bankruptcy attorney. You can get referrals from your state's bar association or the National Association of Consumer Bankruptcy Attorneys. Many bankruptcy attorneys provide a free or discounted initial session to discuss your situation. Technically, you can file for bankruptcy without an attorney, but the process is complicated, and I don't recommend it. Self-help books, Web sites and message boards can help educate you, but they can't give you truly individualized legal advice. If you get it wrong, you'll have no one but yourself to blame, whereas if an attorney screws up, you can sue.
8. Don't drag your heels. Ask bankruptcy experts -- the judges, attorneys and trustees who handle these cases -- and they'll tell you many people wait too long to file, continuing to throw good money after bad as they struggle with debts they can't pay. Once you decide bankruptcy is the right choice for you, take action. Get your attorney the paperwork he or she needs and follow through on the other steps required to keep the process moving.
Continued: Don't throw your money away
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