Bankruptcy is a Federal law that gives debtors (people who owe money) a resolution to claims made against them by creditors (people to whom the money is owed). Its concept is based on a philosophy against endless and inescapable debt. That type of debt is a burden, not only to the debtor, but to society as a whole. There are no debtor’s prisons in our culture. We want our citizens to take risks with money to drive our economy, to start businesses, to buy homes and cars, to buy consumer goods. Bankruptcy is designed to be a safety net against catastrophic failure potentially involved in that risk. And, by design, the effect of filing a bankruptcy can be immediate and clear.
There are two main types of bankruptcies for consumers:
Chapter 7 – is a liquidation of assets followed by a discharge of debt. It is perhaps what you normally think of when you think of bankruptcy. Upon filing the bankruptcy, the Court assigns, through the US Department of Justice, an attorney called the “Trustee”. The Trustee’s job is to examine what you own and see if anything can be sold to pay any of your debt back, even if it is not the full amount. In exchange for a selling of your assets, you receive a total discharge of your debt, meaning that creditor can never take any action to collect on that debt you owe him or her ever again.
Chapter 13 – is essentially a consolidation payment plan. Rather than selling any of your property, you are promising to pay some or all of your debt back over the course of time (usually over the course of 3 to 5 years). You would file a Chapter 13 rather than a Chapter 7 when you have some property that you consider too valuable to lose in a liquidation, when you make too much money to qualify for a Chapter 7, or when you want a payment plan to help pay the arrears on a secured debt, like when you fall behind on your mortgage payments. In order to file a Chapter 13, you need to have enough income to make the plan work, so you need enough income for your normal expenses plus whatever the plan payments may be.
Other types of bankruptcies not necessarily for consumers that you may have heard of include Chapter 11 (reorganization of businesses) or Chapter 12 (reorganization for fishermen or farmers).
No. Bankruptcy law allows for a certain amount of property to be protected from liquidation by the Trustee. In Ohio, we use the Ohio State “Exemption” laws that protect against all creditor collection action. Some examples of the values protected by the Exemption laws (current as of August 2010) includes $21,625 in the equity in your primary place of residence, $3,450 in the equity value of one motor vehicle, $11,525 in the combined amount of all your household goods and clothing (assuming no one item is worth more than $550). These are only samples, and there are many other exemptions to properties, rights and claims that exist to prevent you from losing your valuable possessions by filing a bankruptcy. Although there is never any guarantee, a majority of Chapter 7 filings issue a discharge with no property whatsoever being turned over to creditors.
Immediately upon the filing of a bankruptcy there is a temporary protection put in place against the collection of any debt claims called the “Automatic Stay”. The Automatic Stay is designed to give the debtor a moment to breath and to preserve any assets for possible liquidation by the Trustee. Therefore, immediately upon filing a bankruptcy petition, all attempts to garnish a paycheck, shut off a utility service, suspend a drivers license, or conduct a Sheriff’s Sale on a home, must automatically cease. There are penalties for creditors who collect during a period of automatic stay, including particularly harsh consequences if the creditor had actual knowledge of the bankruptcy.
The Automatic Stay is then replaced by the “Order of Discharge” at the conclusion of your case. The Order of Discharge is a permanent injunction on the part of the creditor to ever collect on the debt. The debt still exists, and can show up on your credit report as “discharged,” but the creditor can never collect on that discharged debt ever again.
Almost every debt you can think of will be discharged in a bankruptcy. The Bankruptcy Code outlines only a specific list of debts that cannot be discharged. The most typical debts that are not dischargeable in bankruptcy include child support and domestic support obligations, most student loan debt, income taxes that are less than 3 years old, and judgments that are the result of a drunk driving accident or intentional tort (you were intending to hurt someone), criminal fines and restitution.
Any other debt will be discharged in the bankruptcy. In Ohio, this includes drivers license reinstatement fees, arrears on utility bills (the utility company will have to restore service, but they may ask for a security deposit), lawsuits, judgments, rental leases, property taxes, and deficiencies after the repossession of a car or foreclosure of a house.
Filing a bankruptcy does not come without any consequences and there are risks involved with its filing. Because of this, it is recommended that you file a bankruptcy only when it is truly necessary.
The biggest risk is the fact that you are barred from filing another bankruptcy for a specified period of time. The time period between the filing of two Chapter 7s, for example, is 8 years from filing date to filing date. So you lose your safety net against any new collection actions for that time. For a period of 8 years, you will lose the ability to stop any garnishments of your check, prevent the shut off of your utilities, and prevent and/or end the suspension of your license caused by a non DUI accident. Therefore, the longer you wait to file, the bigger impact your eventual bankruptcy (if needed) will have.
The other factor to consider is the effect of bankruptcy on your credit history. It makes logical sense to file a bankruptcy if you have impossible debt, because your credit score is already taking a beating. Not so much if you can handle the debt and keep your score up, because the filing of a bankruptcy can put you in a position that makes it difficult to get future credit for a period of time, or, if you can get credit, with unforgiving interest rates.
If you are considering a bankruptcy, it is important that you talk to an attorney about whether it is the right choice for you and what effect it would have on your property and future. The Legal Aid Society of Cleveland is proud to offer bankruptcy counseling and services and potentially provide immediate relief from your overwhelming and burdensome debt. If you are considering a bankruptcy, please contact us today.
Many people are tempted to file bankruptcy without a lawyer because of the high cost of a bankruptcy attorney. The process of self filing, however, is sometimes scary, often confusing, and full of potential pitfalls. If you cannot afford to hire an attorney but think you are a candidate for bankruptcy, apply to Legal Aid or attend a free legal Brief Advice Clinic before filing on your own.
In 2005, bankruptcy law changed to make it more difficult for people to file a bankruptcy. Attorney fees increased dramatically. As a result, fewer people can afford to hire an attorney but the need for counsel in the bankruptcy process is even greater.
Changes to the law include a requirement to file specific documents, taking financial management classes, and testing your level of income to make sure you qualify for a bankruptcy. All these barriers are designed to make your bankruptcy harder and create greater risk for someone filing on their own.
The bankruptcy trustee (who administers the bankruptcy for the Court) will tell you that he or she cannot give you any legal advice if something goes wrong, and will not likely sympathize with you just because you don’t have a lawyer. If you misunderstand the rules, you could accidentally lose your house or your car. If your bankruptcy fails entirely, you may lose your filing fee and have to start again. Worst of all, (where you do not follow a Court order), you may not be able to ever discharge your debts, even if you file a new bankruptcy.
You should also be cautious about using “petition preparers.” They are not attorneys, cannot give legal advice, and likely charge too much for simply typing the forms.
Before you decide to file for bankruptcy on your own, contact Legal Aid at 1-888-817-3777 to see if you qualify for our bankruptcy assistance. You can also find out the date and location of the next free brief advice clinic for assistance.
This article was written by Legal Aid attorney Michael Attali and appeared in The Alert: Volume 29, Issue 1. Click here to read the full issue.