Information
You should NOT be afraid of bankruptcy laws and eliminating debt. What you SHOULD be afraid of is having NO SAVINGS, NO
MONEY left after each paycheck, getting harassed or garnished at work, and getting fired. Many employers do not want to deal with
an employee being garnished and may look for any excuse to fire you once you are being garnished. Our Congress has written these
laws to enable people just like you to get a fresh start. We no longer have debtors' prisons but many people feel they are imprisoned
by their debts AND by the creditors who endlessly harass them. Believe it or not, if you cannot pay your debts, creditors usually prefer
you file bankruptcy! This is because they cannot write off a debt and get the tax savings unless you file bankruptcy OR unless they
hound you for YEARS!
Bankruptcy is FEDERAL LAW that allows everyone to get a fresh start if they have more debt than they can handle. It allows you to
eliminate or reorganize debt without losing possessions. Most people are very confused about what Bankruptcy involves, and many
have heard horrible misstatements about Bankruptcy Law. The cold, hard truth is that most people keep all of their possessions-EVEN
HOUSES AND CARS. The Bankruptcy laws are designed to alleviate the pressure of your debts and make your life better. We will NOT
take your case if Bankruptcy is not going to improve your situation! We have turned down many cases where the people had better
options available.
Chapter 7 v. Chapter 13
Chapter 7
Typically, Chapter 7 is referred to as "liquidation" because you turn over non-exempt property to the trustee assigned to your case.
The confusion lies in the fact that MOST PROPERTY IS EXEMPT. Exempt property means it is not subject to attachment by creditors
or in a bankruptcy, which means you get to keep it. The exemptions vary by state, and you should consult an attorney to determine
what property may be claimed exempt in your state. In most situations, if you wish to keep houses or cars, you simply maintain your
payments as scheduled to the creditor. Chapter 7 is generally the simplest and quickest form of bankruptcy. Most people receive their
discharge within 5-6 months of filing the case.
Chapter 13
Chapter 13 is a consumer debt reorganization. This allows debtors to restructure payments by combining many debts into their "plan"
and paying ONE monthly payment to the Chapter 13 Trustee for all the debts included in the plan. Regular mortgage payments
continue to be made directly to the creditor "outside" the plan. Thus, if you have mortgage arrears, the arrears CAN be included in
the plan, but the future payments due under the loan must ALSO be made separately. The debtor keeps his property and makes
payments to the trustee out of future income to pay all or a portion of his debt over the life of the plan.
Chapter 13 is usually appropriate for people who have fallen behind on secured loans (such as cars or houses) and need to catch up
before repossession or foreclosure. It may also be appropriate when someone has non-exempt property that cannot be protected in a
Chapter 7, or if someone has sufficient disposable income to pay a significant portion of their debt over time. Many factors go into
determining if a debtor qualifies for or should pursue a Chapter 13 filing. You should consult an attorney before deciding if this
avenue is right for you.
Exemptions: What property can I keep?
The bankruptcy code allows individuals who file for bankruptcy to claim certain property as "exempt" property. States can either use
the exemptions in the bankruptcy code, or they can "opt out" and use state law exemptions. Ohio uses its own exemptions, and thus,
the explanations throughout this site may not be applicable to your state. When property is exempt, it is protected from liquidation by
the trustee in bankruptcy. Debtors are able to keep basic assets deemed necessary for a "fresh start" after bankruptcy.
A common concern for people contemplating bankruptcy is the loss of personal possessions and household goods. The exemptions
provided by Ohio law, however, are normally more than sufficient to protect such assets. This is true for a few reasons:
Depreciation on used personal goods is significant - ever been to a yard sale? The resale value of such property is minimal and,
hence, does not represent a significant source of funds with which to repay debt.
The Bankruptcy Code envisions debtors receiving a "fresh start" by getting relief from debts, but still maintaining a decent
standard of living. This is the purpose of exemptions - keeping certain property so as to continue living like a normal person. Being out
of debt would be pointless if you were left with no possessions to continue daily living!
What is exempt?
The amounts set forth in exemptions refer to "sale" value, not purchase price or replacement value. Also, if the property is
encumbered by a non-avoidable lien, the debtor's equity is only that portion of value after the lien is subtracted. Hence, a $10,000
car with a loan against it for $9,000 has $1,000 worth of equity which the debtor may claim as exempt.
The exemptions available to debtors in Ohio are located at O.R.C.2329.66. However, do not be confused by the language of the
code because the actual application of the exemptions in practice varies. For example, a $100,000 house with a $90,000 lien may
appear to have $10,000 worth of equity. In reality, however, this house has little if any equity because if the debtor attempted to sell,
the costs of sale (broker fees, etc) would consume most apparent equity. Hence, it is usually wise to consult an attorney about what
property can be claimed exempt.
Non-exempt assets - what happens?
The theory in Chapter 7 is that all non-exempt assets are turned over to the trustee to be liquidated for funds to distribute to creditors.
In reality, however, this only occurs if the debtor does not wish to "buy back" the property. Hence, suppose a debtor has a non-exempt
widget worth $1,000 which he would like to keep. Rather than sell to someone else, the trustee is normally perfectly willing to sell
back to the debtor for whatever price he could obtain from a third party. The debtor may actually get a better deal because the
trustee incurs no costs of sale, and in many circumstances, payments can be spread out over a short period of time.
Click here for Ohio's exemptions and type "2329.66" at the "find" prompt on that page. The first choice will be Exemptions.
Chapter 13
In Chapter 13, even though a debtor keeps his property, exemptions are still used to determine if a "plan" complies with the
Bankruptcy Code. Creditors are entitled to receive at least as much through the Chapter 13 plan as they would have under a Chapter
7 liquidation. Hence, a debtor's payments into a Chapter 13 plan must provide at least as much to creditors as they would have
received through liquidation in Chapter 7 of non-exempt property.
Houses, cars & other "secured" debt in Chapter 7
If a debt is secured by a lien (i.e. on a car title or a mortgage on real property), the lien usually survives the bankruptcy. Hence, the
personal obligation of the debtor may be discharged, but the creditor's lien survives, and if suitable arrangements are not made, the
creditor may be entitled to repossess his collateral post-bankruptcy. A debtor has several options under the Bankruptcy Code on
dealing with secured creditors:
Reaffirmation: this is an agreement between debtor and creditor that allows the reaffirmed debt to survive as if bankruptcy never
took place. If you later default, the creditor's rights after bankruptcy are the same as before bankruptcy, i.e., you can be sued,
garnished, etc. to collect the debt. Hence, you should think carefully about reaffirming a debt and discuss your options with your
attorney to fully understand the consequences. Most debts are reaffirmed according to the original terms of the agreement, although
it is possible to negotiate modifications in some circumstances.
Redemption: this means you pay the secured creditor only the value of the asset, rather than the balance owed, but this must be
done in a lump sum payment. Redemption is not available for all types of property but is often used with respect to cars or other
personal property. You should consult an attorney about whether redemption is a good idea in your situation. The problem with
redemption is obvious: where does a debtor get a lump sum of cash to redeem the asset? While some people can borrow from family
or from exempt assets, not everyone has that option. There is now at least one company that will loan money to redeem cars
providing you qualify, and most people do.
Surrender: if you surrender the collateral, the creditor sells the asset and applies it to the debt you owe. The balance remaining
after the asset is sold, called the deficiency, is now an unsecured debt and is discharged with your other debts.
Do nothing by simply continuing payments: BUT BE CAREFUL! This option is not written anywhere in the Code. Courts are split
on whether a creditor can repossess collateral post-bankruptcy if the payments are current, but no reaffirmation agreement was signed.
In Ohio, it is generally held that a creditor CAN repossess a car if no reaffirmation was signed even if the payments are current. But in
reality, most creditors realize this is foolish to do. For example, consider a car with a loan balance of $10,000 and a value of only
$6,000. Because of the negative equity, it is usually unwise to reaffirm such a debt because if you default, you will be left with a large
balance. Yet, suppose you want to keep the car and cannot afford redemption. If you maintain your payments and insurance, the
creditor would be foolish to repossess, because at auction they would be lucky to get $4,000 - $5,000 toward the loan. Whereas if they
don't repossess, you are very likely to continue all your payments. But you can only use this option if you could live with the car being
repossessed after discharge.
Other types of property, such as household goods, are never pursued by the creditor simply because it is not cost effective. For
example, suppose you do nothing with respect to a loan secured by a computer. The computer may only have a resale value of $200
at best. It is not likely worth the creditors time or money to repossess even though they are entitled to do so. Creditors must be very
careful not to run afoul of the bankruptcy laws even in collecting their collateral so it may not be worth the risk to them.
Taxes & Student Loans
Taxes - can bankruptcy eliminate them?
Discharging taxes is very complex and you should consult an attorney to determine if your taxes are dischargeable. In order for us to
render an opinion on tax dischargeability, we will need the following:
Nature of the tax (i.e., for what reason it was assessed-income taxes, unemployment taxes, etc)
Breakdown of balance owed for EACH tax year (do not group tax years together because DATES are extremely important in
determining dischargeability of taxes)
Date each return was filed for each tax year
Date assessed by the IRS or other taxing authority for EACH tax year
Information on whether you were later audited and results of said audit
We may request other information in analyzing dischargeability. Remember, our advice is based on the accuracy of the information
you provide. If you are mistaken as to information you give us, the debt may not be discharged even if we thought it might be based
on what you had previously told us. The information you provide will aid us in determining if you would be better suited for Chapter 7
or Chapter 13.
Student Loans -- can bankruptcy eliminate them?
The law on dischargeability of student loans was changed in October of 1998. Student loans are now only dischargeable based on a
showing of "undue hardship." Generally, proving hardship often requires proving to the Court that you cannot maintain a minimal
standard of living if you have to repay the loan, that your financial situation is likely to persist, and some courts require a showing of a
good faith attempt at repayment. This requires a case-by-case analysis, and thus, an attorney can explain your options and the
procedure for handling student loans during your consultation.
The case law varies depending on the jurisdiction so you should consult an attorney in your area to determine if you may qualify for
an undue hardship discharge. However, there are no "bright line" rules on discharging student loans, and ultimately, the decision is
up to the Court.
To aid us in determining the likelihood of proving undue hardship, you should come to your appointment with a very detailed monthly
budget (be sure to include all expenses even if they occur only sporadically-we will average them to determine the monthly amount),
several pay stubs so we may average your income, and last year's W-2 form. More on budgeting.
Bankruptcy Reform Legislation
Bankruptcy Reform has been a hot topic in Congress for several years running now. The bills introduced have been restrictive and
harsh. Fortunately, as of this date, none of these "reforms" have passed. We could never accurately cover the extent of debate and
dislike in this site as has been covered in other sites. Hence, we recommend checking out the ABI (http://www.abiworld.org/) and
NACBA (http://www.nacba.org/) for current updates. These sites are dedicated to bankruptcy and consumer issues, and they are
wonderful sources of information.
One issue we must mention, however, is the push by some to use IRS collection standards to determine monthly living allowances for
those in bankruptcy. This is ridiculous, in our opinion, for two reasons:
. Congress should not afford regular unsecured creditors the same status as taxes in determining how much someone can afford to
pay!
. The IRS standards are so outdated and restrictive as to be laughable. Check them out and see for yourself. Click on: Housing,
Transportation and Other expenses to see the standards used for each.
For the main page for IRS Collection Standards, click here.
