Preparing for Bankruptcy
Okay, so you've looked at your finances, understand why you're in financial trouble, and have considered the alternatives; and you've come to the not-so-happy conclusion that bankruptcy is the best (or only) solution to your financial situation. Now what?
The most important thing is to understand that filing for bankruptcy is a process, not an event. What you do before, during, and after the actual filing will affect your future, as well as the success of the bankruptcy itself. By success, I mean accomplishing the goal of giving you a new financial start. So once you've made the decision to file, here are some recommended next steps to start you on your road to a new financial life. Please note that this information is general in nature, is based on my own experiences, and is not intended as legal advice. If your attorney tells you something different, please listen to your attorney, not me.
Find a Bankruptcy Lawyer
The first thing you should do once you decide to file (or even if you're still deciding whether to file) is talk to a bankruptcy lawyer.
Do you absolutely need a bankruptcy attorney? Well, it is possible to file for bankruptcy pro se (without a lawyer, or representing yourself), but it's difficult, risky, and emotionally draining. It also means that you won't have a lawyer to run interference for you with debt collectors and bankruptcy court trustees. So if at all possible, try to find a lawyer instead of going it alone.
If you simply cannot afford a lawyer, there are many excellent books about do-it-yourself bankruptcy. Just make sure that they're the most recent revisions available. The laws do change pretty frequently. You can also try contacting local law schools or your state or county bar association. They may be able to point you toward self-help clinics that can make the process of filing bankruptcy pro se (that is, by yourself) a little easier. There's also excellent help available on the Bankruptcy Forum from people who have gone through the process themselves.
In general, if you hire an attorney, you will be required to pay him or her in full prior to their actually filing your bankruptcy petition. Some lawyers will allow you to pay part of their fees up-front (generally about half), at which time they'll allow you to tell creditors that they are representing you. This is important because it gets the bill collectors off your back that much sooner. Once they're told you're filing for bankruptcy and that you're represented by counsel, they are forbidden by law from contacting you directly. But before they'll actually file the papers, you almost certainly will have to pay your attorney in full.
Stop Borrowing Money and Using Credit Cards
Once you've decided to file for bankruptcy, you should immediately stop borrowing money and using your credit cards (assuming that you even have any that still work). Why? Because borrowing money or using your credit cards after you've made a decision to never pay that money back is not just sleazy. It's also fraud, and it may result in your being able to live rent-free for an extended period of time at taxpayer expense -- in prison.
This includes borrowing money from family or friends, by the way. When you file for bankruptcy, you must include as creditors any family members or friends who loaned you money. You're not allowed to pay back Uncle Joe, but tell the First Bank of Lower Slobovia that they're out of luck. Friends and family are treated just like banks in bankruptcy court. So if your friends or family want to "help you out" financially after you've decided to file for bankruptcy, they should be made aware that the money they're giving you is a gift, not a loan.
Stop Paying Your Bills
Well, most of them, anyway. You'll want to stop paying any unsecured loans like credit card bills unless told otherwise by your attorney.
You'll still have to pay your rent (and possibly your mortgage), utility bills, your car payment and insurance if you own a car, your health insurance, and any other essentials of life. You may also want to keep paying the bills for things like furniture that are considered security for the loans made to purchase and which can be repossessed.
The bills you want to stop paying are those that are for unsecured debt like credit cards. Don't worry about what that will do to your credit score. It's going to get shot to hell anyway once you file. So use that money to save up to hire a decent bankruptcy lawyer.
You also should keep making your car payments, even if your car is a jalopy that you wish the bank would repossess. Having a repossession on your record is even worse than having a bankruptcy when it comes to getting another car loan in the future. It will make it almost impossible to get a car loan from any reputable lender.
In particular, don't do any of the following unless your attorney advises you otherwise:
- Don't repay friends or family members who made unsecured loans to you.
- Don't pay some unsecured creditors but not others within the three months prior to filing bankruptcy. If you stop paying one of them, then stop paying all of them. There are legal reasons for this, but I'm not qualified to explain them. Ask your attorney about it when you hire one.
- Don't transfer any property, cash, or anything else of value to anyone else to "try to get it out of your name." That can result in an expense-paid stay at the Gray Bar Motel.
If you have any doubts about what to pay and what not to pay, ask your bankruptcy lawyer -- the one you hired with the money from all those unsecured debts that you stopped making payments on -- or ask about it on the BK Forum.
Learn How to Live Poor
Bankruptcy will mean that you're going to have to do without certain things for a while. You'll have to live on a cash basis, and many things you used to enjoy will be temporarily out of your reach. So you may as well get used to it now. You're also going to have a hard time convincing a bankruptcy trustee that you're too poor to pay your bills if you drive up to the bankruptcy court in a Lamborghini. Most importantly, if you want bankruptcy to be what's it's supposed to be for you -- a second chance at a new financial life -- you may as well start learning to economize now.
Reclaim your Phone
From the time you stop paying your bills until you retain an attorney to file for bankruptcy, bill collectors can (and will) call you with the specific objective of harassing you into insanity until you pay your debts. That's they're job. But nothing says you have to make it easy for them. Read more about reclaiming your phone (and your sanity) here.
In the meantime, if bill collectors have your cell phone number and are calling you on it to hound you, one thing you can do to immediately to stop them cold is to buy a prepaid cell phone (or a prepaid SIM card if you already have an unlocked GSM phone) with a different number. Don't provide your real name or address when you activate it. Most prepaid phone carriers don't give a rat's ass what name you provide, anyway. That's one of the reasons why prepaid phones are so popular with drug dealers.
In addition, make sure that you always buy refill cards for your phone using cash. Credit or debit cards can be tied to the phone number and traced back to you. Most importantly, never use your new phone to call a bank, credit union, bill collector, utility company, any other entity that issues credit, or anyone else in the financial industry. If you do, they will snag your number; and within days, it will be uploaded to the credit bureaus where every bill collector in the world will have access to it.
Finally, be careful about smartphone apps! Many of them can snag your phone's number. If the app wants permission to access "Phone," "SMS," Device Information," "Contacts," or "Identity," you may want to think twice about installing it.
Filing for bankruptcy tends to be a very depressing, shame-filled, and guilt-ridden thing for most people. This is normal. But don't let it ruin your life. Mope around for a day, two at the most, shed a few tears if you like, and then move on. But do tell someone that you have decided to file for bankruptcy and why. It can be a family member, a counselor, a clergy member, or a friend.
Don't live in shame. You're not the first person to have made financial mistakes.
Start Planning Your Recovery
Once their debts are discharged, a lot of people don't know exactly what to do next. Many start by looking for a new car, which is a worthy goal, but probably not a realistic one immediately after discharge unless you want to get ripped off. You can read more about that here. Others swear to live on a "cash-only" basis for the rest of their lives, which also is okay if that's what you want to do. But some day, you're probably going to want to buy a car, a home, or some other purchase for which you won't have enough cash laying around. When that day comes, it will be a lot easier to get a loan if you've already begun to re-establish credit.
Whatever you ultimately choose to do, the chances of it actually happening are much better if you have a plan. So start planning your recovery before you file for bankruptcy. Keeping your goals in mind will help give you time to formulate ways to achieve those goals while the wheels of the court system are dragging on. I suggest you discuss the following financial recovery goals with your attorney or bankruptcy counselor:
- Opening a savings account: Immediately upon discharge.
- Getting a secured credit card: Within a month after discharge.
- Having a decent amount of money in your savings account: Within six months after discharge.
- Having enough cash to pay for a 20 percent down payment on a new car: Within a year of discharge.
Of course, these are just some suggestions. Your goals may be different based on your priorities in life, your income, your age, and your plans for the future. But if I had to pick any one step is essential to recovery from bankruptcy, it would be opening a savings account; so let's talk about that here.