As you go through your bankruptcy, you will have many questions. Our attorneys and staff look forward to answering them all. Below are some common questions that people considering bankruptcy often ask us. As you have other questions, please contact us for a free consultation so we can give you all of the information you need to make an educated decision.
What is the difference between Chapter 13 and Chapter 7 Bankruptcy?
Let’s start with Chapter 13. Chapter 13 allows a person in most circumstance to pay some portion of their debts back over a 3 to 5 year period. The percentage of your debts that you pay can be anywhere from 0% to 100%, depending on several factors. In a 13, you make a monthly payment to someone called a “bankruptcy trustee,” who then distributes that money to your various creditors. In most cases, after you make your last scheduled payment, the rest of your unsecured debts are discharged, or eliminated. There are a few situation where a chapter 13 is often a good option:
- You are behind on your mortgage and need some time to bring it current;
- You have a significant amount of money left over each month in your budget after you pay your living expenses; or
- You have significant equity in some of your assets.
- You owe a lot more on your vehicle loan than the vehicle is worth at the time the case is filed. Read about “cramdowns” for more information on how this can possibly help you.These are the 4 most common reasons that a client might be a suitable
candidate for a Chapter 13.
Chapter 7 is very different. In a Chapter 7 bankruptcy, the case is
typically only open for a few months. Most Chapter 7’s involve a situation where you don’t have a lot of equity in your assets. Equity is the difference between what your property is worth minus what you owe on it. For example, a house worth $100,000 with an $80,000 mortgage has about $20,000 worth of equity. The law allows you to keep certain amounts of equity in your assets, and if your equity isn’t significantly more than those allowed amounts, many times a chapter 7 will be filed. Most clients who file a chapter 7 bankruptcy are able to keep their house and/or their car, but it is important to understand that your monthly mortgage payment and car payment will not be changed by your having filed bankruptcy.
Can I keep my car if I file a Chapter 7 Bankruptcy?
It is important to many clients that they be able to keep their vehicle, so that they have transportation to work, school, etc. In most cases, you are able to keep your car even after you have filed bankruptcy. The first thing that we have to look at is how much equity you have in your vehicle. In other words, if you sold your car for its Blue Book value and then paid off the loan, how much money would you have left? This is your “equity” in the vehicle. Most clients have little, if any, equity in their vehicles. Each state has a set amount of equity that you can “exempt,” meaning you can have that equity in the vehicle and still have your debts discharged without having to repay your creditors. In Ohio, that amount is $3,225.00. If your equity in your vehicle is significantly more than that amount, you would
have to pay something to your creditors to be able to keep the vehicle. For a married couple filing together, you can double that exemption amount because each spouse has a $3,225.00 vehicle exemption.
Sometimes banks will request that you sign something called a “reaffirmation agreement” for one of your loans. This is a document that gets filed with the bankruptcy court and says that you agree to treat that particular loan as if you had never filed bankruptcy. Rarely is this in your best interests, but it is something that we assess on a case-by-case basis.
Will anyone find out I filed bankruptcy?
This is a very common question by potential bankruptcy clients. No one wants to file bankruptcy, and it is often a decision that clients are very humbled and sometimes embarrassed by. Fortunately, the local papers do not, at this time, publish a list of people who have filed. The names of the people who have filed is all public record, but, practically speaking, it is very unlikely that anyone would ever just stumble across this information. There is, however, another way that people might find out about a bankruptcy filing. Everyone you owe money to must be listed on your bankruptcy papers and will receive notice from the court that you have filed. This means if you have an account at the local hardware store, for instance, they have to be listed on your paperwork and they will get a letter from the court
stating that you have filed bankruptcy. If a bill is very small, sometimes clients will decide to pay the bill before we file the case so that notice will not have to go to that local creditor, but for larger balances, this may not be an option.
What is a bankruptcy “discharge?”
“Discharge” is the legal term for how a bankruptcy takes away your legal liability for your debts. In other words, once a debt has been “discharged,” the creditor cannot try to collect against you for the debt. They are not allowed to call you about the debt, send you letters, sue you on the debt, garnish your wages, or levy your bank account. The debt is essentially “wiped out.”
We have so much equity in our assets (or a lot of income) that I don’t see how bankruptcy can help us – surely we will have to pay back all of our debts!
Some people (those with a lot of equity in their assets or high household income) are, in some cases, required by the bankruptcy rules to repay their creditors 100% of what is owed. So why would they want to consider bankruptcy then? Once a bankruptcy case is filed, all of your unsecured debts are “set.” In other words, the amount you owe is frozen as of that date and that is the amount that you will have to repay. No more interest accrues on the account, no more late charges, no more “over limit” fees, etc. Often times we deal with people who are caught in a trap of paying the minimum monthly payment on their credit cards and, even though they aren’t making any more charges on the cards, their balance is growing every month because the interest is more than the minimum payment amount. In a bankruptcy, you can repay the debts with every penny going toward paying down the balance.
Here is an example that brings home this point:
Romeo and Juliet owe $10,000 on their credit cards, with an average interest rate of 25%. They want to pay off their debt in the next 5 years. If they do this without filing bankruptcy, it would take monthly payments of $294 per month to do this in 5 years. On the other hand, if these debts were paid in full but through their bankruptcy, there would be no new interest accruing after the case is filed, so they would only have to pay $166 per month to pay the debts off in full in 5 years. That is a savings of $7,680 in interest!! They can utilize bankruptcy to still pay 100% of their debt, but with less money per month, so they have freed up money to put into savings each month. In fact, if Romeo and Juliet put the difference into their savings during that 5 years, they will have paid off their entire debt and have $7,680 in the bank when they are done!!
If I file bankruptcy, will I ever be able to get a loan again?
Yes. Right after the bankruptcy is filed, you will start getting loan offers from various banks. Some lenders actually get the list of names and addresses from the bankruptcy court so they can try to solicit your business. Once you have filed bankruptcy, you are an attractive customer to the banks for two main reasons:
- The bank knows that since you have just filed bankruptcy, you cannot get your debts discharged in bankruptcy again for at least 8 years, so that is not something they have to worry about, and
- You have just stripped off your debts, so you have freed up income that is now available to make loan payments.
Example: We recently had a client that we electronically filed a Chapter 7 bankruptcy for on a Friday afternoon. The clients later reported to me that the following Wednesday after their case was filed, they had loan offers from various banks in their mailbox which read, “We know you filed bankruptcy, and we’d like to give you a loan”!! That is a drastic example, but makes the point well that you will be able to start re-establishing your credit soon after your filing.
What do I have to do to file bankruptcy?
There are a few things that need done in order to file a case:
- You (and your spouse, if it is a joint filing) must take a Credit Counseling course from an approved agency. We recommend either Hummingbird or the Institute for Financial Literacy. This must be completed prior to the case being filed. Note that the cost is $50 for either one person or for a couple taking it at the same time. If a husband and wife take the course separately, you have to each pay the $50.
- A petition is filed with the court that lists you income and expenses as well as your assets and your liabilities (debts). We gather this information from you by your filling out our Bankruptcy Workbook;
- We have to file with the court copies of your (and your spouse’s if a joint filing) pay check stubs for pay received within the 60 days prior to the case being filed. These are referred to as “pay advices.”
After the case has been filed, there is one more big requirement:
- You must attend the Meeting of Creditors , also referred to as the “341 hearing,” a term that refers to the section of the U.S. Bankruptcy Code that mandates that hearing as being necessary. An attorney from our law firm will be there with you and will explain what you can expect at the hearing. In most cases, this is the only time you will have to appear in a proceeding related to your bankruptcy.
Can just one spouse file bankruptcy?
We get asked this question often. Thankfully, the answer is yes! In cases where all of the unsecured debt is in the name of just one spouse, we often times recommend just that spouse filing. If this is a possibility, it can help by preserving the credit score of the other spouse in case there is a later need to take out a loan. If both spouses’ names are on the various accounts, it typically makes sense to file a joint case, where both spouses are filing. Otherwise, if the accounts are joint, meaning in the names of both spouses, and only one spouse files, the lender will go after the non-filing spouse for payment of the debt.
I have already been sued by one of my creditors. Can bankruptcy still help me?
Yes. When a bankruptcy is filed, an “automatic stay” goes into effect. The stay serves to stop any collection activity of your creditors. This means that they cannot continue to call you, send you letters, etc. to try and collect the money that you owe them. If a lawsuit has already been started, it freezes at whatever stage it is in when the bankruptcy is filed. If a creditor already has a judgment against you, the filing of the case will stop the creditor from being able to move forward and garnish your wages or levy the money in your bank account.
We have been thinking about entering a debt management or credit counseling program; how is bankruptcy different than these programs?
If you have the ability to repay a portion of your debts, you may have considered one of these options. Many credit counseling plans will negotiate interest rates for you that are slightly lower than what you are paying now, and set you up with a monthly payment that you make to the plan and they then forward the money to your creditors. One big difference with a bankruptcy is that upon filing the case, your balance is frozen and no more interest or late charges are added from that point forward. We figure out what you are able to pay monthly and your creditors get that money with the rest being wiped out (the legal term is “discharged”).
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Requires the following notice:
We are a Debt Relief Agency. We help people file for bankruptcy relief under the Bankruptcy Code. This web site is not an offer to provide bankruptcy assistance services to any assisted person as defined under Section 527(a)(2) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.