Bankruptcy Basics
The United States Constitution provides a method for individuals, burdened by excessive debt, to obtain a "fresh start" and pursue productive lives unimpaired by past financial problems. It is an important alternative for persons strapped with more debt and stress than they can handle. The federal bankruptcy laws were enacted to provide good, honest, hard-working debtors with a fresh start.
The quality of the lawyer or law office you select will have a huge impact on how your bankruptcy proceeds through the system. Start by meeting with a bankruptcy attorney who works for a legal firm that specializes in bankruptcy law. The Bankruptcy Code requires the application of a "means test" to determine whether you qualify for relief under chapter 7. If your income falls below certain thresholds you can continue on with the filing of a chapter 7 bankruptcy. If your income is in excess of certain thresholds, you may not be eligible to file a chapter 7 bankruptcy, but instead may need to seek relief under chapter 13 of the bankruptcy code. Only an attorney, well versed in bankruptcy law, will be able to determine whether you are eligible to file a chapter 7 bankruptcy. In either event, your attorney will help you gather the information and documents which will be used to prepare your bankruptcy petition and schedules. Your bankruptcy begins by the filing of the bankruptcy petition and schedules with the court.
An important feature of bankruptcy filings is the automatic stay. The automatic stay means that the filing of a bankruptcy petition automatically stops lawsuits, repossessions, foreclosures, sheriff sales, evictions, garnishments, bank attachments, utility shut offs, and debt collection harassment. It offers you a breathing spell by giving you and the trustee assigned to the case time to review your financial situation. Creditors cannot take any further action against you or the property without permission from the bankruptcy court.
Usually, the only formal proceeding at which you must appear is the meeting of creditors, which is usually held at the Bankruptcy Court. This meeting is called a "341 meeting" because section 341 of the Bankruptcy Code requires that you attend this meeting so that the trustee, and on very rare occasions creditors, can question you about debts and property.
A fundamental goal of the federal bankruptcy laws enacted by Congress is to give you a financial "fresh start" from burdensome debts. Supreme Court made this point about the purpose of the bankruptcy law in a 1934 decision:
- [I]t gives to the honest but unfortunate debtor…a new opportunity in life
and a clear field for future effort, unhampered by the pressure and discouragement
of preexisting debt. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
This goal is accomplished through the bankruptcy discharge, which releases you from personal liability for specific debts and prohibits creditors from ever taking any action against you to collect those debts. Our web site describes the bankruptcy discharge in a question and answer format, discusses the timing of the discharge, the scope of the discharge (what debts are discharged and what debts are not discharged), objections to discharge, and revocation of the discharge. It also describes what you can do if a creditor attempts to collect a discharged debt after the bankruptcy case is concluded.
Types of Bankruptcy
The Bankruptcy Code is divided into chapters. The chapters which almost always apply to consumer debtors are chapter 7, known as a "straight bankruptcy", and chapter 13, which involves an affordable plan of repayment.
Chapter 7 Bankruptcy
In a chapter 7 case, the bankruptcy court appoints a trustee to examine you regarding your assets to determine if there are any assets not protected by available "exemptions". Exemptions are laws that allow you to keep, and not part with, certain types and amounts of money and property. For example, Ohio’s Exemption Laws allow you to protect a certain amount of equity in your home ($10,200), motor vehicle ($3.225), household goods ($10,225), all cash surrender value in life insurance (If your spouse, child or a dependent is the beneficiary), health aids, retirement plans, specified future earnings such as social security benefits, child support, and alimony, your entire earned income credit and child tax credit included in your federal income tax refund, and certain other types of personal property, including a “wild card“ exemption which applies only in bankruptcy and which allows you to exempt an additional $1,075 in any property you elect. If there is any non-exempt property, it is the Trustee's job to sell it and to distribute the proceeds among the unsecured creditors. In most cases people keep all of their property and get rid of all their debts. There are some exceptions like cars and homes, which you can keep as long as you continue to make your regular monthly payments to the secured creditor and if you fail to make your payments the creditor still has the right to repossess your car or foreclose on your home. In most cases you will not owe them any money if either the car or home sells for less than is owed on it and there is a deficiency balance. In addition, there are certain types of debt which are allowed special treatment and cannot be discharged. These include some student loans, alimony, child support, criminal fines, and some taxes. You normally receive a discharge just a few months after the petition is filed.
Chapter 13 Bankruptcy
In a chapter 13 case, you put together a plan, following the rules set forth in the bankruptcy laws, to repay certain creditors over a period of time. A chapter 13 case may be advantageous in that you are allowed to get caught up on mortgages or car loans without the threat of foreclosure or repossession, and to keep both exempt and nonexempt property. Your plan is a document outlining to the bankruptcy court how you propose to dispose of the claims of you creditors. Your property is protected from seizure from creditors, including mortgage and other lien holders, as long as the proposed payments are made and necessary insurance coverage remains in place. The plan generally requires monthly payments to the bankruptcy trustee over a period of three to five years. These payments are made automatically through payroll deductions. Unlike chapter 7, you do not receive an immediate discharge of debts. Instead, you must complete the payments required under the plan before the discharge is received.
What Bankruptcy Can and Cannot Do
Bankruptcy may make it possible for you to:
- Discharge liability for most or all of your debts and get a fresh start. When the debt is discharged, you have no further legal obligation to pay the debt.
- Stop foreclosure actions on your home and allow you an opportunity to catch up on missed payments.
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment and other debt collection harassment, and give the individual some breathing room.
- Restore or prevent termination of certain types of utility service.
- Lower the monthly payments and interest rates on debts, including secured debts such as car loans. NOTE: Home Loan Modification legislation presently pending in Congress will, if passed, allow bankruptcy judges to reduce the amount owed on your home to its fair market value, lower your interest rate, spread your payments out over as much as forty years, and reduce your interest rate -- all of which should result in a substantial reduction in your monthly mortgage payment.
- Allow you an opportunity to challenge the claims of certain creditors who have committed fraud or who are otherwise seeking to collect more than they are legally entitled to.
- Eliminate certain rights of secured creditors. Although you can force secured creditors to take payments over time in a chapter 13 bankruptcy, you generally cannot keep the collateral in either a chapter 7 or 13 bankruptcy, unless the you continue to pay the debt.
- Discharge types of debts singled out by the federal bankruptcy statutes for special treatment, such as child support, alimony, student loans, certain court ordered payments, criminal fines, and some taxes.
- Protect all co-signers on their debts. If relative or friend co-signed a loan which you discharged in bankruptcy, the co-signer may still be obligated to repay whatever part of the loan not paid during the pendency of the bankruptcy case.
- Discharge debts that are incurred after bankruptcy has been filed.
Bankruptcy's Effect on Your Credit
By federal law, a bankruptcy can remain part of your credit history for 10 years, but practically bankruptcy affects your ability to obtain credit for a much shorter time. As part of our representation of you we will be obtaining credit reports and a credit analysis which will project what you can expect your credit score to be one year after filing bankruptcy. Surprisingly, most people who file for bankruptcy see their credit bureau scores go up by approximately 70 points. It is not unusual for the projected scores to rise from the mid 500’s to 660 or 670. The filing of a bankruptcy can actually improve your ability to obtain credit.
Glossary of Terms
The bankruptcy process is complex and relies on legal concepts like the "automatic stay," “discharge," "exemptions," and "assume." The Glossary Tab of this web site provides a glossary of Bankruptcy Terminology which explains, in layman's terms, most of the legal concepts that apply in cases filed under the Bankruptcy Code.