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Bankruptcy is a major decision and not one to be taken lightly. The first step in deciding if bankruptcy is right for you is to gather all of your financial information in one place. You need a full list of both your debts and your assets. Divide your debts into two piles: secured and unsecured. Secured debts include mortgage and auto loans – debts that are linked to a specific piece of property. All your other debts, such as medical and credit card debt, are unsecured. When you file bankruptcy, your unsecured debts are the ones that get discharged. If you’re struggling specifically with mortgage or auto debt, a bankruptcy won’t wipe those out, unless you are willing to surrender the asset. However, it can remove the pressure of your unsecured debts, making payment on your secured debts more manageable. When considering whether bankruptcy is right for you, think about your budget. Can you adjust it in order to pay off your debts? Are you facing repossession or foreclosure? Have you been sued for collection? If you don’t think you can pay off your debts, bankruptcy may be the right choice. Bankruptcy will also put a stop to repossession, foreclosure, collection lawsuits, wage garnishment, and other collection actions. 




In order to file a bankruptcy, you must complete two mandatory counseling 

sessions (1 hours long) either online or by phone. 

A. Credit Counseling Session – must be taken before filing the petition. 

B. Financial Management Session – must be taken after the petition has been 

filed. You will be referred to two different counseling companies who offer their 

sessions either by phone or online. You will receive a certificate which needs to be turned into the bankruptcy court. 




When you have officially filed a bankruptcy, you get the protection of the “automatic stay”. The automatic stay makes it illegal for creditors to attempt to collect from you during the bankruptcy process. It’s designed to ensure that all of your financial affairs are dealt with through the bankruptcy court without creditors pressuring you from outside the system. When you file, the creditors listed on your bankruptcy forms will be notified. They need to know both so they can be involved in the process and so they don’t violate the automatic stay. 




When you file a bankruptcy, it goes to the local Bankruptcy Trustee. The Trustee is in charge of managing the entire bankruptcy process. He or she mediates between you and your creditors to ensure that both sides act honestly. The Trustee will evaluate your assets to determine if any are non-exempt. California offers two different exemption systems to protect your assets. The “equity” is the amount you own outright – it’s the value of the asset minus any debt attached to it. For example, if your house is worth $300,000 and you still owe $250,000 on the mortgage loan, your equity is $50,000. The bankruptcy exemptions cover that equity. Remember that non-exempt property will be sold and a fraudulent transaction may result in dismissal of your case, so you should be completely honest with the state of your finances. Otherwise, you may lose important assets or, worse, have your case dismissed altogether. 




Once the Trustee has reviewed your case, he or she will schedule a “meeting of creditors”. This meeting, also called a “341 Hearing,” is probably the only time 


you’ll actually have to go to the courthouse during the bankruptcy process. It will take place between 21 and 40 days after you file. Your creditors may attend but many choose not to do so. Creditors typically only attend if they have some objection to your filing. When everyone has asked their questions, the Trustee may ask you to bring in more documents or amend your filing. If that’s the case, you may have to attend a second hearing with the new documents and amended filing information. 




If you have secured debts, such as a mortgage or auto loan, you’ll need to decide how you want to handle them. If you’re behind on payments, the creditor may ask the court to lift the automatic stay and allow repossession or foreclosure proceedings. If not, you’ll have the option of either giving up the property or reaffirming the debt. If you reaffirm the debt, you agree to continue to make payments as usual. Note: that a reaffirmed debt cannot be discharged in a later 

bankruptcy, so think carefully about whether you’ll be able to keep up the payments. 




Once your non-exempt property is sold and your secured loans are handled, your remaining unsecured loans are discharged. “Discharge” means they’re forgiven entirely. Creditors can’t try to collect them from you anymore – you officially no 

longer owe the money. Your unsecured debts include credit card debt, medical debt, and personal loans. 

Remember that some types of debt cannot be discharged. These include student loans debt, debt incurred due to driving drunk, child support debt, and spousal 

support debt and some federal income taxes. Those debts will survive your bankruptcy and you’ll need to address them after your discharge. 




Now that you’re free of unsecured debt, you can start over with a clean financial slate. Your credit score will be somewhat damaged by a bankruptcy, but it was probably already damaged by missed payments. Now it’s time to slowly rebuild your credit. 

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