The two most common consumer, non-business, bankruptcies are chapters 7 and 13.
CHAPTER 7 – THE WALK AWAY
Chapter 7, entitled Liquidation but commonly referred to as “the walkaway bankruptcy”, contemplates an orderly, court-supervised procedure by which a trustee takes over the assets of your estate, reduces them to cash, and makes distributions to creditors, subject to your right to retain certain exempt property and to the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of your assets. These cases are called “no-asset cases.” If you want to keep property secured by a debt such as a home or car, then you must be current in your payments. If you own too much “stuff” (for lack of a better phrase) then you may have to pay the trustee to keep the stuff or you may have to surrender (give up) the stuff. A consumer, non-business, chapter 7, no-asset bankruptcy may only be filed every eight years from the date of filing.
In most chapter 7 cases, if you are an individual, you receive a discharge that releases you from personal liability for certain dischargeable debts. You normally receive a discharge just a few months after the petition is filed. Amendments to the Bankruptcy law made in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 aka “BAPCA” require the application of a “means test” to determine whether individual consumer debtors qualify for relief under chapter 7. If your income is in excess of certain thresholds, you may not be eligible for chapter 7 relief and be forced into a mandatory chapter 13. Also, there are debt caps about which to worry. In a chapter 7, there are no caps of debt. In a chapter 13, there are caps of unsecured debt $383,175 and secured debt $1,149,525. If you have to catch up on mortgage arrears, lower interest rates on a motor vehicle, remove/strip a property lien or if you were over the means test (had too much income), then you would have to look at a chapter 13 which is a significant pain. The chapter 7 is awkward and painful but temporary. The 13 creates lingering periods of discomfort.
CHAPTER 13 – THE REPAY
Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income, aka the payback bankruptcy, is designed for an individual debtor who has a regular source of income. You may have significant equity in your home, motor vehicle or other assets and you can afford to repay a percentage of your debt over a period of a minimum of three to a maximum of five years. You can keep all your stuff but have to make payments. A chapter 13 also can be utilized to pay your mortgage arrears slowly while keeping current payments after filing. If you buy, sell, refinance, transfer or have any transactions over $500, we must have permission of the court to act. An astute bankruptcy lawyer will figure out the “chapter 7 value”, or what was left in the pot of a chapter 7 that you would have to pay the trustee, and put you into a chapter 13 case long enough to pay that amount, and then convert you into a chapter 7. When questioned by the chapter 7 trustee, he will see that you have already paid the chapter 13 trustee the amount that you would have had to pay him in a chapter 7 case. Otherwise, if you just did the chapter 7 bankruptcy from the get-go, then you would have to scramble to pay the chapter 7 trustee. For example, if you inherited your dad’s 1923 Jewett Roadster motor vehicle, you may have had to pay the trustee $20,000 if you used your motor vehicle exemption on another vehicle. If you are filing a bankruptcy, you probably don’t have that amount of cash lying around. If you had three years to pay that back, your cost would be $20,000 divided by 36 months plus 5.5% for the chapter trustee’s administrative fee. It’s kind of like paying 5.5% to keep your dad’s car while you pay off the value of the Jewett Roadster.
Chapter 13 is often preferable to chapter 7 because it enables you to propose a “plan” to repay creditors over three to five years. In certain situations, you can cram down interest rates and balances on motor vehicles paid within the plan, avoid a second or third mortgage that is unsecured, or get caught up on your mortgage arrears. Chapter 13 is also used by consumers who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. You want a lawyer to fight for you to get your plan approved. Fights are with the trustee and the secured creditors generally.
Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7 such as property settlements from divorce cases. So if you got a raw deal on your divorce, don’t file a chapter 7. A man got literally thrown into jail for a month because he could not pay the exorbitant amount that his divorce attorney strong-armed him into accepting. It was a property settlement that could have been paid as an unsecured debt in a chapter 13.
What can you keep? Stuff that is exempt.
As of January 2014, the standard maximum exemptions in Ohio include the following:
- no limit pension that you “cannot touch” without severe penalty prior to retirement (ERISA-qualified but you must provide a “Summary Plan Description” obtained from your human resource person).
- no limit lump sum workers’ compensation and Social Security claims as long as these amounts are not co-mingled with other funds and lose their identity. These amounts may be indicia that you can afford to fund a chapter 13 plan so disclose any claims to your lawyer as soon as possible. Remember, you can be in a chapter 13 repayment plan at a minimum amount, receive notice of settlement or award, convert to a chapter 7 if your circumstances permit, and then add in any new debt incurred in good faith for the duration of the chapter 13. For example, you could file a claim for social security disability benefits and your average wait for approval in Ohio is two years. You have anxiety aggravated by the constant harassment of creditors calling you and cannot afford to pay them individually. You do not qualify for Medicaid as a disabled person yet. You have to seek medical treatment or you could die. By filing a chapter 13, you could pay back a very low percentage to all of your creditors in one easy payment that includes your attorney’s fees. And you manage not to have a nervous breakdown! The bankruptcy permits you to incur additional medical debt that can later be discharged under the proper circumstances. Then you can pay back your medical providers if you so choose at your own pace without the anxiety.
- $132,900 equity per person in the deed to the house or mobile home so a husband and wife jointly filing and on title would be $265,800. A couple may have paid off their mortgage but have been living on credit cards for necessities of life, robbing Peter to pay Paul as the saying goes. Now they can discharge their credit card debt and not lose their home with equity of $265,800 not including the mortgage. This is a big deal because many of my clients have “bailed out” their children and grandchildren for years. This homestead exemption is not typical in other states which are noticeably smaller.
- $12,250 in household goods (garage sale value of everything in your home or apartment) and any one item can be valued $575
- $23,000 permanent damage in a personal injury case per person injured
- $ 3,675 equity per person in title on an automobile; husband and wife on one title $7,350
- $ 2,325 tools of the trade. If you are a carpenter: your saws, hammer, nail gun, etc. as priced on Craig’s list or garage sale. If you are a photographer: your cameras, lenses, lights, and screen drops.
- $ 1,550 in jewelry (resale value). Wedding rings are exempt (or ok to keep) under the new federal law-Ohio has yet to adopt this! Just because you did not pay for an item does not mean anything. If Grandma gives you a ring for your birthday, that is significant because it is separate property in divorce law but you still own it under bankruptcy law. So don’t bother arguing that it is a gift. It is part of the pot.
- $ 1,225 per person wildcard/debtor’s choice of whatever you want; jointly filed, $2,450 if both own an asset. This exemption can be applied towards your income tax refund, motor vehicle, whole life insurance value, or other asset. If you have a motor vehicle in both of your names, then you can have the double motor vehicle and double wild card exemption. You simply cannot change the titling just before you file the bankruptcy though. Then you would be a hog.
- $ 450 per person in cash and on total accounts: cash on hand, checking, savings, income tax refund, etc. By the way, you are also entitled to keep certain tax refund credits such as the child care credit.