Bankruptcy Questions and Answers

What is bankruptcy?

Bankruptcy is a court procedure that allows people to wipe out (“discharge” is the legal term) certain debts they owe, such as credit card balances, loans, contracts, rental agreements, mortgage loans, overdue utility bills, and other types of debts. It also can help people to get caught up on certain debts and keep property, such as a house or motor vehicle, and it can stop many types of lawsuits and legal procedures such as garnishment against a person. It can be an excellent way for a person to get rid of debts and legal proceedings that are destroying their life and obtain a fresh start.

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Are there different types of bankruptcy?

There are several types of bankruptcy. They are referred to by chapter number: chapter 7, 11, 12, and 13. (The chapter numbers refer to the federal laws that govern them.) These different types of bankruptcy accomplish different things for the debtor and have different ways of qualifying to file them.

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Chapter 11

If a business is experiencing financial difficulty but may be able to survive if it restructures its debts, chapter 11 may be an option. Chapter 11 is more complex and more expensive than chapters 7 and 13. Chapters 7 and 13 are far more common for the average person.

 

Chapter 12

Chapter 12 is a type of bankruptcy available for persons engaged in a farming or commercial fishing operation. Its requirements are so limiting that only a tiny number of people use chapter 12 each year.

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Chapters 7 and 13

These are by far the most used forms of bankruptcy. They are the types of bankruptcy Attorney Bates handles and are discussed in the rest of these questions and answers. 

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What types of debts are, or are not, wiped out in bankruptcy?

Debts that are wiped out in bankruptcy

Credit card balances

Car loans (In most cases you will have to give up the car, though)

Loans on boats, motorcycles, ATV’s RV’s, but you will have to give up the collateral

Mortgage loans, but you will probably have to give up the property

Money owed on leases, but you will have to give up the leased property

Medical bills

Overdue rent

Overdue utility bills

Contracts

Personal loans

Bank and finance company loans

Payday loans

Debts you owe because of negligent injury you caused to someone. Please call Attorney Bates at 330-339-0000 to discuss any debts like this.

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Debts that are not wiped out in bankruptcy

Unpaid child support

Unpaid spousal support

Some personal and business taxes cannot be wiped out. This can be complicated. Call Attorney Bates, at 330-339-0000, to discuss at no charge.

DUI and other fines for criminal offenses

Debts you owe because of intentional injury you caused to someone probably will not be wiped out if that person objects. Please call Attorney Bates to discuss any debts like this you have.

Damages you owe because of a crime you committed such as embezzlement cannot be wiped out.

Marital property settlement debts are not wiped out in chapter 7 but may be wiped out in Chapter 13. Please call Attorney Bates, 330-339-0000, to discuss any debts like this at no charge.

Student loans are usually not wiped out, but if it would be unlikely you could ever pay them back because of extreme hardship, it is possible to wipe them out but a special lawsuit must be filed and won. Please call Attorney Bates at 330-339-0000 to discuss this at no charge.

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Does my spouse have to file if I file bankruptcy?

​Normally, your spouse does not have to file bankruptcy with you if you file. But, it may be best for your spouse to file with you. Attorney Bates can help you decide whether you both should file. Here are some factors that may be important in deciding:

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Your spouse's debts

If your spouse does not file, your spouse will remain liable for debts that your spouse co-signed with you and for his/her separate debts. If you have a lot of debt that is separate from your spouse, this could be a reason for you to file alone.

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Your spouse's property

The non-filing spouse's separate property isn't part of your bankruptcy. So it could make sense for you to file alone if your spouse has significant separate property that could be lost by filing.

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Your spouse's income

If your spouse does not file, you usually must still disclose your spouse's income unless you are separated. That does not mean that your non-filing spouse's property or credit will be affected.

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Your spouse's prior bankruptcy or lack of cooperation

In some situations, you may have to file separately, regardless of what you want. For example, if your spouse filed a chapter 7 case within the past eight years or a chapter 13 within the past six years, your spouse probably should not file a chapter 7 case at this time.  Also, if your spouse simply won't cooperate, you may have to file separately.

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What happens to a cosigner on a debt I owe if I file bankruptcy?

Although your bankruptcy releases you from a debt, it does not release a cosigner or anyone else who owes the debt with you. That person will continue to be responsible for the debt unless that person files bankruptcy, too. This applies to your spouse if he or she cosigned a debt with you. This is true in chapter 7 and chapter 13 bankruptcy and includes cosigners on secured loans, such as houses and motor vehicles.

If you keep the house or the motor vehicle and continue to make the payments, the cosigner will not be affected although you file bankruptcy. For example, let's say you and a friend (possibly your spouse) cosign on a loan for a car you buy. If you file bankruptcy and continue making the payments and keep the car, your friend won't be affected. If you give the car back to the lender and stop making the payments, the car will be sold and there will be a balance remaining. You friend will remain liable for that balance and you will not because of your bankruptcy.

You are required to list on your bankruptcy papers the names and addresses of all cosigners, co-debtors, and co-borrowers. The court will use this information to notify them. So, they will know that you filed bankruptcy.

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Do I have to file right away?

In most cases, a person has plenty of time to prepare their bankruptcy case and file it. But some types of situations may require action soon, such as these:

Your home is in foreclosure

You have been served with garnishment papers

You are being evicted

You have been served with lawsuit papers

You are going to have a vehicle repossessed that you want to keep

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Can I file bankruptcy more than once?

If your prior case was a chapter 13 bankruptcy and you paid 70% to 100% of the creditors’ claims in the prior case, you may be able file a chapter 7 case now no matter when you filed the prior chapter 13 case.

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If you paid less than 70% of your creditors’ claims in the prior chapter 13 case, you can file a chapter 7 case if 6 years have passed since you filed the prior case. You can file another chapter 13 case if two years have passed since you filed the prior case.

 

If your prior case was a chapter 7 bankruptcy, you can file another chapter 7 bankruptcy if 8 years have passed since your prior chapter 7 case was filed. You can file a chapter 13 bankruptcy if 4 years have passed since your prior chapter 7 case was filed.

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What are the differences between chapter 7 and chapter 13 bankruptcies?

Eligibility

There are important differences in eligibility between these chapters. This is complicated and is discussed in the question titled: "How do I qualify for chapter7 or chapter 13?"

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Payments

In chapter 7, the debtor almost never has to make any payments to the court on his/her debts. In chapter 13, the debtor almost always has to make monthly payments for 36 to 60 months.

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How long it takes

Chapter 7 usually takes about 3 months. Chapter 13 takes 36 or 60 months depending usually on whether the debtor’s annual income is below or above the means test amount. Call Attorney Bates at 330-339-0000 if you have questions about this.

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What happens to the debtor’s property?

In chapter 7 most or all of the debtor’s property is usually protected by law and is not lost, but on occasion, some of the debtor’s property will be sold by the trustee to pay towards the debtor’s debts. In chapter 13, the debtor keeps all property. If you want to know whether you would lose any property in bankruptcy, call Attorney Bates, at 330-339-0000.

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There are other important differences between chapter 7 and chapter 13. Chapter 13 often allows the debtor to remove some types of liens from real property. This is complicated. Please call Attorney Bates at 330-339-0000 to discuss at no charge.

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Do I qualify for chapter 7 or chapter 13?

Most people qualify either for chapter 7 or chapter 13. Some people qualify for both. A few don't qualify for either one. Please call Attorney Bates at 330-339-0000 for free answers to your questions about eligibility. Here are some more details about qualifying for chapter 7 or chapter 13:

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Types of persons

Individuals and businesses can file chapter 7. Only individuals, including sole proprietors (persons engaged in business), but not corporations or partnerships, can file chapter 13.

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Debt limits 

There are no debt limits in chapter 7. In chapter 13, you can have no more than approximately $419,000 in unsecured debts and approximately $1,257,000 in secured debts. These limits change every three years. (Please call Attorney Bates, 330-339-0000, for exact amounts.) Unsecured debts include credit cards, student loans, personal loans, most tax debts, medical bills, old unpaid rent, child support, spousal support, and restitution debts. Secured debts are secured by collateral including mortgage loans, car loans, mechanic’s liens, and some finance company loans. If you exceed the debt limits, you will probably have to file a chapter 11.

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The means test

This test must be applied to determine whether a person must file chapter 13 or can file chapter 7 if they prefer. If a person "fails" the means test, they cannot do chapter 7 and must file chapter 13. There are three steps in the means test:

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1. Are you exempt from the means test?

If you are exempt from the means test, you do not have to pass it to file chapter 7.  You are exempt if you have more business debt than personal debt. Certain military members and veterans are exempt, also. If you are exempt, the means test does not require you to file chapter 13. But there may be other reasons why you will prefer to file chapter 13 or must file it. Examples are that you have property that you will lose if you file chapter 7, or you are behind on debts that require you to make payments to get caught up to keep collateral, such as motor vehicle loans and mortgage loans or you have too much money left over each month after you pay your necessary living expenses.

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2. Do you pass the means test?

The means test requires you to compare your gross annual household income to the "average" gross annual income for a family of your size in your geographical area. If your income is not greater than the average income, you'll pass the means test and may file chapter 7 (but may still choose to file chapter 13 anyway, as described in this information).

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3. If your income is above average, take the second part of the means test

If your gross income is above the "average," you can take the second part of the means test by deducting certain allowed expenses to see if you may still pass the means test. You'll be eligible for chapter 7 if you don't have enough income to pay into a chapter 13 plan after making these deductions. If you do have enough income after making these deductions, you will have to file a chapter 13 and cannot file a chapter 7.

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Disposable income test

Even if you pass the means test, if your budget shows that you have enough monthly income left after you pay all your living expenses to make payments to the court on your debts, you must file chapter 13 and make monthly payments usually for 36 months. This happens sometimes when the debtor has no car payment and has a low rent payment. In this situation, the payment is determined by how much the debtor’s budget allows, not by the amount of the debt. So, often the debtor will be able to pay off his/her debts at far less than 100% of what is owed. If you happen to be in this situation, Mr. Bates often can give you advice on steps you can take that will eliminate this problem and allow you to file a chapter 7 without having to make payments in a chapter 13. Please call Attorney Bates at 330-339-0000 if you’d like to discuss this at no charge.

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If I have to file a chapter 13, how much will I have to pay?

If you must file chapter 13, you must have enough income after paying your monthly living expenses to cover the larger of the following usually over five years in monthly payments:

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1. All of the debts that can't be wiped out in bankruptcy and on which you must get current

These are debts such as taxes, spousal and child support arrearages, house payment arrearages, and car payment arrearages. You must have enough income to pay these arrearages and bring these debts current in 60 months of payments, in order to file chapter 13.

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2. The nonexempt value of any property

If you own real estate or a motor vehicle with high value that is paid off or some other item of property you want to keep that you will lose if you file a chapter 7, then, to keep that property,  you will have to file a chapter 13 and pay enough over 60 months to equal the nonexempt value of the property.

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3. Your disposable monthly income

This is the amount left over each month after subtracting your monthly living expenses from your take-home income. You must pay at least this amount for three to five years depending on whether or not you passed the means test. If you passed it, you will have three years. If you did not, you will be in chapter 13 for 5 years.

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Will I be able to afford the chapter 13 payments? It is highly likely that you will be able to afford them. Mr. Bates will discuss all your options, including not filing bankruptcy, so that you can decide on the best thing to do.