Individuals and businesses use bankruptcy as a way to obtain relief from debts owed to creditors.
The United States Constitution authorizes Congress to pass uniform laws on bankruptcy. Laws governing bankruptcy have existed since the early 1800s. The Bankruptcy Code (Title 11 of the United States Code), enacted in 1978, has been amended several times, most recently with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. While there is no constitutional right to relief from debts, relief granted by the bankruptcy courts is available to the extent Congress provides.
The Bankruptcy Code provides for relief from debts either through a liquidation (Chapter 7) or reorganization (Chapters 11, 12, or 13). This pamphlet discusses some of the issues to consider before filing for bankruptcy and the differences between a liquidation and a reorganization case. Before making a decision about whether to seek bankruptcy protection, one should consult a qualified bankruptcy lawyer.
What types of bankruptcy relief are available?
Individuals are eligible to file for bankruptcy under Chapter 7, Chapter 11, Chapter 12 or Chapter 13 of the Bankruptcy Code.
Chapter 7 bankruptcy is known as liquidation, or “fresh start” bankruptcy. In a Chapter 7 case, a trustee (assigned by the U.S. Trustee’s Office or chosen by the debtor’s creditors) may liquidate, or sell, the debtor’s non-exempt assets to pay all or a portion of the debts owed to creditors. As a practical matter, most assets owned by a debtor will be treated as exempt. many Chapter 7 trustees find that more than 80 percent of their cases are resolved as “no asset” cases, meaning that all assets are exempt or encumbered with liens.
State law protects you from having certain property taken. This property is “exempt” from liquidation during bankruptcy, and may include, for example, a certain amount of equity in a home, a vehicle, furniture, clothes, etc.
When estimating the amount of money that can be made from selling a particular non-exempt item in a Chapter 7 liquidation bankruptcy, a bankruptcy trustee typically will subtract the individual’s exemption from the property’s “fair market value” (what a ready, willing and able buyer will pay for the property in “as is” condition). The trustee also will subtract whatever the individual may owe for any liens or mortgages that may be on that property.
The trustee will only liquidate assets that will net cash to pay your creditor. The trustee also must deduct the fees and expenses paid to any professionals (such as Realtors or auctioneers) assisting in the liquidation of the property). Through this liquidation process, any debts the trustee does not pay (with certain exceptions) will be discharged (eliminated), and creditors will not be able to force the individual debtor to pay any remaining amount owed.
Chapter 13 bankruptcy, or individual reorganization, is an alternative to Chapter 7 that allows an individual to keep his or her property. In a Chapter 13 bankruptcy (unlike a Chapter 7 bankruptcy), the individual must pay a portion or all of the debt back. The individual filing bankruptcy under Chapter 13 must be able to fund a payback plan and meet certain debt and asset limits. Effective October 17, 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, individuals who earn more than the median income (based on family size) in the state where they lived before filing bankruptcy, and who can repay at least $6,000 of their debt over five years, are no longer eligible for relief under Chapter 7.
Instead, these individuals must repay their creditors over time through a Chapter 13 plan. Under Chapter 13, an individual debtor would submit a plan detailing how all of his or her debts will be paid from disposable monthly income (income after providing for ordinary living expenses) over a period of time of up to five years. The plan of reorganization is monitored by a Chapter 13 trustee and supervised by the bankruptcy court. Upon the successful conclusion of payments under the plan, the bankruptcy court enters a discharge order. A Chapter 13 debtor must pay the creditors at least as much as they would receive if the assets were liquidated in a Chapter 7 case. In that way, Chapter 7 and 13 bankruptcies are treated equally.
Chapter 11 “reorganization” is typically used by corporations or businesses, or individuals whose debts exceed the Chapter 13 debt limits, as an alternative to Chapter 7 liquidation. Since a reorganization under Chapter 11 can be a very expensive process, it is not frequently used by individuals. In a Chapter 11 reorganization, as in a Chapter 13 reorganization, the business debtor keeps business assets and must pay creditors with future earnings according to a reorganization plan.
Chapter 12 is a special reorganization for family farmers. To qualify, a family farmer must earn most of his or her income from family farming operations.
When is it appropriate for me to file for bankruptcy?
The decision whether to file for bankruptcy is based upon each debtor’s unique situation. If you are considering bankruptcy, whether individually or for a business, you should consult with an experienced bankruptcy lawyer who can determine whether you should explore such an option and when it would be most beneficial to file. Generally speaking, it may be appropriate to file for Chapter 7 bankruptcy when you are unable to pay your debts and regular living expenses and when all of your property is exempt. When you have property (typically a house or car) that you wish to keep from the reach of creditors, a Chapter 13 bankruptcy may be more appropriate.
Before filing, consider:
* changing the terms of a loan (duration, balance due, interest, monthly payments);
* surrendering your property to fully satisfy the debt (a “short sale”);
* determining whether you may be eligible for certain entitlement programs that may exempt your property from seizure;
* entering a state court trusteeship or getting assistance from a reputable debt relief adviser.
How would I go about filing for bankruptcy relief?
To initiate a bankruptcy, you would file a petition with the bankruptcy court and pay a filing fee, unless the court waives this requirement. You also may be able to pay the filing fee in installments. The petition contains detailed information about all your assets and liabilities on documents called schedules. These documents include an accurate list of everything you own, the outstanding amount of the debts you owe to all your creditors, as well as personal information about your employment and whether you have made any transfers of money or property just before you filed for bankruptcy.
After these documents are filed, you meet with a trustee. Your creditors are invited to attend. The trustee checks the petition and schedules for accuracy. Also, the trustee and the creditors might ask you questions about your financial situation.
Can a husband and wife file together for bankruptcy?
Yes; it is possible, but not required. Spouses can file a joint petition if they both need relief from their creditors. However, depending on the circumstances, one spouse may file for relief under Chapter 7 or 13 and the other spouse may choose not to file at all or may file his or her own separate bankruptcy case. When spouses file separately, the assets and liabilities for each spouse will be considered separately by the bankruptcy court.
Can the bankruptcy court refuse to discharge my debts in bankruptcy?
Yes. Filing a bankruptcy petition does not guarantee that your debts will be discharged.
The bankruptcy court may deny a general discharge of debts if you commit certain acts of misconduct before or after filing the bankruptcy petition, such as destroying, concealing, or removing assets that might otherwise be used to pay creditors. A discharge of debts may be denied if you have destroyed or concealed records that show what assets are available to pay creditors. Finally, the bankruptcy court may deny a general discharge if you have lied under oath during the bankruptcy case, or have refused to answer questions.
Certain debts may not be discharged, based upon an action taken by your creditor. If you incurred a debt within three months of filing a bankruptcy, a creditor may presume you incurred that debt fraudulently and file an adversary proceeding (lawsuit) against you to keep the court from discharging that debt. In the adversary proceeding, your creditor can claim that you made a “luxury” purchase (like buying a new television set) or incurred any debt with the intention of not paying it back. Such legal action is generally taken in a Chapter 7 to force you to pay that entire debt back. In a Chapter 13, a creditor would bring this action to force you to pay that entire debt back, rather than only paying a portion of it.
Aside from acts of misconduct, you will not be granted a general Chapter 7 discharge if you have obtained a discharge in a Chapter 7 case within eight years or a Chapter 13 case within six years. You can file a Chapter 13 four years after having filed a previous Chapter 7 that was discharged. Also, you can file a Chapter 13 two years after having filed a previous Chapter 13 that was discharged.
Even if a discharge of debts is denied, your assets still may be liquidated in a Chapter 7 case. There are certain limitations to your ability to convert your case to a Chapter 13 after you’ve filed a Chapter 7. The denial of a discharge does not relieve you from your other obligations under the Bankruptcy Code.
If a general discharge is granted, will I still have to pay any debts?
Yes. Even if a general discharge is granted, some debts are not discharged in bankruptcy. Further, the type of bankruptcy affects what debts may be discharged. Generally, more debts are discharged in Chapter 13 than in Chapter 7. Congress provided for greater relief under Chapter 13 as an incentive to encourage debtors to repay their debts through a reorganization plan.
Debts that might not be discharged in bankruptcy include taxes assessed within 240 days of the bankruptcy filing, student loans, most debts arising from a divorce court order, criminal fines and debts arising from a DUI, and any debt incurred because a debtor has committed fraud, breached a fiduciary duty as a trustee, or committed a “willful” act causing injury to a creditor. The bankruptcy court ultimately will decide whether these types of debts will be discharged.
How does filing bankruptcy affect my credit?
Filing bankruptcy will be noted on your credit record for up to ten years, but the effect of this notation to a particular creditor may depend on whether a discharge was granted or the case was dismissed, and what type of bankruptcy case it was: a Chapter 13 reorganization or a Chapter 7 liquidation. It is common for individuals who file bankruptcy to have trouble getting a new loan, or they may have to pay a higher rate of interest to secure one.
© 8.31.2010 Ohio State Bar Association. All rights reserved. Used with permission.
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The information contained in this pamphlet is general and should not be applied to specific legal problems without first consulting your own attorney. This is one of a series of LawFacts public information pamphlets. Others may be obtained through your attorney’s office, by writing the Ohio State Bar Association or through www.ohiobar.org.
For more information on Bankruptcy, please contact Swartz Law Office, LLC, or the Ohio State Bar Association at:
Ohio State Bar Association
P.O. Box 16562
Columbus, OH 43216-6562
(800) 282-6556 or (614) 487-2050