Basic Bankruptcy Information for Individuals and Married Couples
This informational packet is NOT legal advice. To find a bankruptcy attorney, call your local bar association or call your local legal aid.August, 2014
The Informational Packet: Purpose
The purpose of this informational packet is to introduce you to two common bankruptcy options that are available to individuals and married couples. These options are described by referring to the “Chapter” of the statute that provides the rules that people have to follow when they file each type of bankruptcy. Thus, you may hear of “Chapter 11 bankruptcy” or “Chapter 7 bankruptcy.” Some chapters regulate bankruptcy for businesses, while others regulate bankruptcy for individuals. This informational packet describes the differences between the two most common types of individual bankruptcy: Chapter 7 and Chapter 13. While this packet can steer you in the right direction in choosing a bankruptcy type that’s right for a person in your situation, the information provided here is very basic and cannot address all of the issues that may affect you and your case. This document does not tell you whether you should file for bankruptcy or which type of bankruptcy you should file. For that advice, you need to consult a lawyer.
This packet is structured in the form of questions and answers. Section I provides an overview of bankruptcy. Section II provides information that is applicable to both Chapter 7 and Chapter 13 cases. Section III is specific to Chapter 7 bankruptcy, and Section IV is specific to Chapter 13 bankruptcy. Section V consists of defined bankruptcy terms. Throughout this packet, any term that is in bold and underlined (ex. discharge) is defined in Section V.
Table of Contents
IBankruptcy Overview…….…………………………………………………….……… 3
IIGeneral Information Applicable to Both Chapters 7 and 13 Bankruptcy Filing...... 6
IIIChapter 7...... 9
IVChapter 13...... 12
VBankruptcy Definitions……..….....……………………………………………………. 15
I. Bankruptcy Overview
This Section provides a general overview of bankruptcy. Remember, special bankruptcy words are in bold and underlined (ex. Trustee), and their definitions are in Section V.
Q1: What is bankruptcy?
Answer:Bankruptcy is a legal proceeding initiated in court by a person who is unable to pay his or her financial obligations. After the bankruptcy process is complete, either allorpart of the debt may be discharged.
Q2: Why doesa person file for bankruptcy?
Answer: There are manydifferent reasons for filing bankruptcy. Some individuals file bankruptcy because they want relief fromtheir debt, while others file because they want to keep their property and pay all or some of their debt.
Q3: Are there any alternatives to bankruptcy?
Answer: Yes. Before deciding to file for bankruptcy you should also consider alternatives. For example, you can contact your creditors to see if they will agree to a modified payment plan that you can afford. You can also contact your creditors to see if they will agree to a negotiated settlement of your debts. Debt counselors may be able to help you negotiate payment plans or negotiate reduced interest rates that will help you get out of debt without filing bankruptcy. Some non-profit organizations provide debt counseling at no cost.
Q4: Should I speak with a lawyer?
Answer: Yes. You should speak with a lawyer before deciding to file for bankruptcy. A lawyer has a better understanding of the law and how it will apply to your situation. Don’t decide to file for bankruptcy simply on the advice of a friend or relative, or based on what you’ve heard. Additionally, don’t rely on document preparers or paralegals. While theycan help you fill out the necessary forms, they cannot tell you what to put in the forms.
Q5: How will bankruptcy affect my credit?
Answer: A bankruptcy will be reflected on your credit report for ten years after you file for bankruptcy relief. You can expect your credit score to drop. Creditors look at your credit report when deciding whether to give you credit and at what interest rate. For example,as a result of the bankruptcy filing, you may have a higher interest rate on credit cards, car loans, or home loans.
Q6: What is the difference between Chapter 7 and Chapter 13 bankruptcy?
Answer: Individuals and married couples who file for bankruptcy in Ohio usually file a Chapter 7 or a Chapter 13 bankruptcy. In either type of bankruptcy, you begin your case when you file a Petition with the court. Then, you must file Schedules and Statements of Affairs, which allow the court to learn what you own and what you owe. The court will then appoint a Trusteeto look over your case.
People usually choose to file a Chapter 13 bankruptcy if they have stable income so that they are able to make small monthly payments to repay their debt. In a Chapter 13 case, a person is able to keep some or all of his or her property. In a Chapter 7 bankruptcy, a person usually cannot afford to make monthly payments. In a Chapter 7 bankruptcy, most of the debtor’s property is used to pay off the debt and the remaining balance may be discharged completely. The tables below summarize some of the main differences between Chapter 7 and Chapter 13 bankruptcy.
Q7: Which Chapter will hurt my credit more?
Answer: It is unclear how each Chapter will affect your credit. Your credit report will say which bankruptcy you filed. Some creditors may look more favorably at Chapter 13 bankruptcy because it shows your willingness to repay at least some of the debt. Others maylook at when your bankruptcy was completed and you received a discharge. In a Chapter 13 bankruptcy, it takes longer to receive a discharge. However, some people believe that there is no difference in the harm caused to your credit between Chapter 7 and Chapter 13 bankruptcy.
Q8: How do I know if I qualify for Chapter 7 or Chapter 13?
Answer: Each type of bankruptcy has different requirements. On the following page, there is a brief summary of the requirements for Chapter 7 and Chapter 13 bankruptcy. More detailed information is available in the latersections of this packet.
Requirements for Chapter 7:
Requirements for Chapter 13:
II. General Information for Chapter 7 and Chapter 13 Bankruptcy
This Section provides information applicable to both Chapter 7 and Chapter 13 bankruptcy proceedings. Remember, words that are in bold and underlined (ex. secured debt) are defined in Section V.
Q1: If I plan to hire an attorney, what advice would you give me?
Answer: When you are considering hiring an attorney, it is important that you understand the extent of the services that you will be paying for. Attorneys bill at different rates for different kinds of services that you may need in your bankruptcy case.
Q2: What happens after I file for bankruptcy?
Answer: If the court accepts your bankruptcy petition, a bankruptcy estate is created. Temporarily, the bankruptcy estate is the legal owner of your non-exempt property. Non-exempt propertyis property that you own over a certain value limit established by the U.S. Bankruptcy Code. However, in both Chapter 7 and Chapter 13 proceedings, you will be able to keep your exempt property, or property that you own under the value limit established by the U.S. Bankruptcy Code, such as your car or your home. Next, a Trustee will be appointed to manage your case. The Trustee is a neutral party who will ensure a fair administration of your bankruptcy estate. The Trustee may not give you legal advice.
Q3: Will my creditors be able to seek payment from me after I file for bankruptcy?
Answer: Once you file a petition under either Chapter 7 or Chapter 13, you will receive thebenefit of what is known as an automatic stay. An automatic stay prevents creditors from calling you and attempting to collect on most types of debt that you owe.
But if you have filed for bankruptcy within the past year and that previous case was dismissed, an automatic stay protects you for only 30 days after the new case is filed. However, an automatic stay may be continued after the 30 day period if you are able to show good cause. If you have filed two or more bankruptcy cases during the prior year, an automatic stay will not protect you unless the court orders protection after a hearing, determining that your filing was made in good faith. Good faith means that you filed for bankruptcy because you are seeking debt relief, and you are not filing simply because you want to abuse the automatic stay provision of the U.S. Bankruptcy Code.
Q4: What do I do if creditors refuse my attempts to pay them?
Answer: Sometimes, creditors will refuse your attempts to pay them, in fear that accepting payment may violate the automatic stay. If this happens, do not spend the money but instead set the money aside until the Trustee or the court addresses the situation. The Trustee or the court could order you to make a lump sum payment to the creditor.
Q5: Will filing for bankruptcy prevent me from being evicted or prevent my home from being foreclosed upon?
Answer: If you file for bankruptcy to prevent being evicted from a residence you rent, the landlord will be able to continue with that eviction if the landlord obtained a judgment before you filed your bankruptcy case. If you are filing bankruptcy to save your home from foreclosure, you must file before the mortgage company completes the foreclosure sale. If you file after the foreclosure sale is completed, you may lose your home.
Q6: Will I have to pay secured debts?
Answer: Under both Chapters, you must pay secured debt if you want to keep the property that secures the debt. For example, usually your home is the property that secures the mortgage on that home. That means that if you don’t pay your mortgage, the secured creditor will take your home. So if you want to keep your home you must continue to make regular monthly payments on your home mortgage. Likewise, you must continue to make payments on debt that is secured by your car if you want to keep your car. In addition, you must maintain any necessary insurance and provide your lender with proof that the lender is named as an additional loss payee on the insurance policy.
Q7: Are all my debts dischargeable in bankruptcy?
Answer: Under both Chapters, most debts can be discharged in a bankruptcy case, but there are some debts that are not dischargeable.
Q8: Is my student loan debt dischargeable?
Answer: Under both Chapters, student loan debt is considered non-dischargeable debt, unless you prove to the Court that you would suffer an undue hardship if forced to repay the debt. The existence of undue hardship depends on the particular facts of your case, but is generally very difficult to prove.
Q9: How will filing for Chapter 7 and Chapter 13 affect my credit?
Answer: The Fair Credit Reporting Act permits credit agencies to reflect a bankruptcy on your credit report for ten years after the date of filing. The credit report will also reflect under which Chapter you filed.
Government agencies may not discriminate against you because you have filed for bankruptcy. However, lenders may take your bankruptcy filing into account when deciding whether to grant you credit and in determining what interest rate you will have to pay. Lenders may refuse to grant you credit at all, or may impose a higher interest rate on your credit card, car loan, or home mortgage loan.
Q10: If I plan on filing for bankruptcy, how should I go about paying my creditors now?
Answer: You should make an effort to repay your creditors equally with the money that you have. But more specifically, you should avoid making exclusive payments to one or more of your unsecured creditor(s)within 90 days before filing your petition, or within 1 year before filing your petition if the person you paid was an insider (i.e. a relative). These payments to your unsecured creditors are known as fraudulent transfers. If the Trustee is unable to recover your fraudulent transfer, you may be required to pay your other creditors the value of the fraudulent transfer.
Q11: Can I protect my property from my creditors by transferring it to another person?
Answer: No. You should not, under any circumstances, transfer your property to another person to avoid paying your creditors. If you do so, you may lose your right to discharge the debt associated with that property. Also, the Trustee will likely be able to file a claim for the recovery of your illegally transferred property. The Trustee may recover any property that you transferred either (1)for a price substantially less than that property’s real value, or (2) with the intent to prevent your creditors from obtaining it. In either case, you will not be able to claim the transferred property as exempt. So do not attempt to defraud your creditors by making property transfers. You will be better off trying to claim the property as exempt from the beginning.
III. Chapter 7
This Section provides information specifically for Chapter 7 bankruptcy. Remember, words that are in bold and underlined (ex. dismissal) are defined in Section V.
Q1: How do I determine whether I satisfy the means test?
Answer: You can determine whether you satisfy the means test by completing the means test form: “Chapter 7 Statement of Current Monthly Income and Mean-Test Calculation.” You may find this form at the following website: /BK_Forms_Official_2010/B_022A_0410.pdf.
Q2: What property can I keep if I choose to file Chapter 7?
Answer: You may keep only your exempt propertyif you file forChapter 7 bankruptcy. The remainder of your property that is non-exempt must be turned over to the Trustee. The Trustee will then sell the property and use the proceeds to repay your creditors.
Q3: How much does filing for Chapter 7 bankruptcy cost?
Answer: The filing fee for a Chapter 7 is $335.
Q4: What will the Trustee do for my case?
Answer: The Trustee has a broad range of duties. The Trustee may hire an attorney to assist in the administration of your case (if your case is complex). Also, within 20 to 40 days of your bankruptcy filing, the Trustee will hold a Meeting of Creditors, which you are required to attend. Your failure to attend will result in dismissal of your case. Prior to the meeting, you will receive a detailed letter from the Trustee requesting that you bring certain documents to the Meeting of Creditors.
Q5: What will happen at the Meeting of Creditors?
Answer: During this meeting, a court reporter will place you under oath, and you must tell the truth under penalty of perjury. If you lie, you can go to jail, so it’s really important that you are honest with the Trustee and your creditors. During the meeting, you will have to address any questions related to your bankruptcy case from both the Trustee and any creditors.
Q6: What will happen after the Meeting of Creditors?
Answer: Within 10 days after the Meeting of Creditors, the Trustee will tell the Bankruptcy Court whether you qualify for Chapter 7 bankruptcy or not. After the Meeting of Creditors, the Trustee may request additional information from you relating to your financial affairs in order to complete the assessment of your case.
Also, after the Meeting of Creditors, you will likely be required to complete an instructional course in personal financial management in order to receive your discharge. The U.S. Trustee’s Office has a list of approved financial management course providers. You may choose among any of the providers on that list. To access the list, go to Trustee’s website at or call 602-682-4000 for more information. You must complete the course and file a certificate that shows you have completed the course and you must file an official form issued by the Court, called “Debtor’s Certification of Instructional Course Concerning Personal Financial Management.” You must file this form along with the actual course completion certificate that you received from the course provider within 45 days of the Meeting of Creditors. If you fail to file this form your case will be dismissedand you will not get a discharge. You would then have to pay an additional $260 to have the case re-opened to obtain your discharge.
Q7: How long will I have to be involved in my Chapter 7 bankruptcy case?
Answer: It depends. Most likely, your personal involvement in a Chapter 7 case will conclude a few months after filing, when the judge grants your discharge. Exactly how long it takes to get your discharge depends on your individual circumstances. For example, if a creditor objects to your discharge or if the Trustee must recover your non-exempt assets, sell them, and then pay your creditors, your Chapter 7 case may take longer. Or if a creditor objects to your discharge your case may also take longer.
Q8: What does it mean to have the judge grant a “discharge” in my Chapter 7 case?
Answer: Once the judge grants you a discharge you do not need to make any more payments on that particular debt. A discharge will also bar your creditor from attempting to collect overdue payments from you. However, after the discharge, your creditors may take back any property which secures their debt. For example, a creditor who has a lien on your car may take the car back if you do not keep up on your payments after the discharge. Also, if any loan document permits a creditor to take back your car because you filed for bankruptcy, the creditor may be able to take the car back despite the discharge. A discharge does not mean your case is going tobe dismissed; it means only that your involvement in the case will conclude.