The number one mistake people make before they file bankruptcy is to incur a debt without the intent to repay it. During the bankruptcy process, there really are not many mistakes you can make other than not doing what your attorney tells you to do. If I advise the client on how to answer the questions at the creditor’s meeting and the debtor starts talking about things they should not be talking about and the trustee starts inquiring further and wants more documentation, then that is one mistake a debtor can make. I always tell my clients if the trustee asks you what color is the sky, the answer is blue; you do not say, “If it is cloudy, then it can be pink and orange and if it is sunset, we can have a rainbow”; you just answer Question A with Answer A and move on.
In terms of the mistakes that people make after bankruptcy, the biggest one is taking on bad credit. What I mean by bad credit is going to the used car lot down the street and buying a terrible car at 22% interest. People must understand that they need to rebuild their credit first, then they can do things like get car loans at 6% to 10%, which is a lot more reasonable than 22%.
Those are the big mistakes; getting into really bad credit situations after you file bankruptcy. People have to remember that once they file a Chapter 7, if you get in trouble you have nowhere to run; you cannot file another bankruptcy for eight years which means you have to be extremely careful when you incur a new debt. I always advise my clients that the only debt you want to incur is if you absolutely must; otherwise, you want to pay cash. The only reason to get credit cards and loans and things is to improve your credit score and not to put yourself into more debt again.
What Can Someone Do to Prepare for Filing Bankruptcy?
The best thing I can say about preparing to file bankruptcy is to follow your attorney’s instructions. As for my bankruptcy clients, I lead them carefully through the process. Often, people are upset because they do not know which documents they need or what they are supposed to do; they do not know when they are supposed to take their credit counseling classes. If the attorney does not properly lead them through the process and things do not go smoothly, then the attorney is to blame.
One thing that I have done is to make the process for filing bankruptcy very simple. I have a questionnaire that is 18-20 pages, but most people fill in about 3-4 pages of information and then answer a bunch of questions yes or no. After they fill out that questionnaire, I give them a document production sheet telling them which documents they need; for example, their car registration, proof of automobile insurance and a current loan statement for their car, a copy of your 401(k) statement and bank statements; if they have a home, I need to see proof of their homeowners insurance. I also ask them for six months of pay stubs so that I can do the calculations to see that they qualify for Chapter 7, or if they are in a Chapter 13 so I can prepare the budget for the trustee.
When the clients provide me all those documents, I prepare the petition, then they come in to my office and they sign the petition. Then we file the case and they are on their way. Over the last twenty years that I have been doing this, the biggest problems I have seen in cases is usually because the case was not managed properly at the beginning, so by doing things the way I do them, the process generally runs relatively smoothly. The clients do not feel like they are being harassed and that the attorney is incompetent; when they come to me, they know that I know what I am doing and I know everything I need them to do and if they just follow my instructions, they will sail right through.
Are there Any Further Steps for a Client After the Paperwork Has Been Filed?
One thing you have to do when you file bankruptcy is to complete the credit counseling and credit management classes. The credit counseling class is an online class that you take before you file; it takes a couple hours, after which you get what is called the Certificate of Completion, which the company emails to me because I need that to file the case. After you file, you have to complete the credit management class; you also take that online, it is a nominal fee, about $18; once you complete that class, I upload your certificate to the bankruptcy court website and that is about it.
The only other issue that really comes up afterwards is that you have to attend the meeting of creditors; you’ll be there for about an hour and you’ll testify for about 3 or 4 minutes on average. Once you get through the creditors meeting and you do your second class, you are pretty much done in a Chapter 7, other than if you want to reaffirm your car loan, which is essentially you agreeing to keep the debt and report it to the credit bureaus. Once you do all that, you are done. The bulk of the work for the client is before the filing. Once the case is filed, it is pretty much smooth sailing other than doing the second class and going to the meeting of creditors.
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