Bankruptcy Basics

What can bankruptcy do for me? 

Bankruptcy is a legal proceeding in federal court to stop debt collection until the debts are sorted out according to law.  Bankruptcy may:

  • Eliminate the legal obligation to pay most or all of your debts to give you a fresh financial start. This is called a “discharge'' of debts.
  • Stop foreclosure on your house.  Allow you to catch up missed payments.
  • Prevent repossession or force a creditor to return repossessed property.
  • Stop wage garnishment, bank attachment, and similar debt collection actions.
  • Restore or prevent termination of utility service.

What bankruptcy cannot do  

It can’t fix all credit problems.  It usually cannot:

  • Eliminate certain rights of creditors holding debt secured with a mortgage or lien.  If you have secured debts, you have to decide whether to continue to pay on the debt (reaffirmation), pay the market value of the item (redemption) or return the secured item to the creditor.  You generally cannot keep collateral unless you pay the debt.
  • Discharge certain types of debt including child and spousal support, most student loans, court restitution orders and fines, and some taxes.  
  • Protect cosigners on your debts.  If you discharge a debt in bankruptcy, your cosigner may still have to repay all or part of the loan.
  • Discharge debts incurred after bankruptcy has been filed.

What is the difference between a Chapter 7 and Chapter 11 bankruptcy?

A Chapter 7 bankruptcy fully discharges most unsecured debt.  It is designed to give you a fresh start.  You must decide whether to pay for or give up secured property (see above).  In a Chapter 13, both secured and unsecured debts are paid under a repayment plan.  The plan must be completed within 3 to 5 years.  Chapter 13 is often used when a debtor has regular income and a secured debt for a house or motor vehicle.  The debtor wishes to keep the property but payments are in arrears.  Chapter 13 allows the arrearage on the house or motor vehicle to be paid over time under the plan.

Both bankruptcies have an automatic stay provision.  Neither a creditor nor a state court can take any further action on the debt without permission from the Bankruptcy Court.  The stay will stop a foreclosure or repossession, at least until the creditor obtains ‘relief from stay.’

Will I lose my home or car if I file bankruptcy? 

Under Ohio law, a person may keep certain personal or real property and income because it is ‘exempt’ from attachment, garnishment or sale by a bankruptcy trustee.  An exemption may cover the value of an item only up to a certain dollar amount.  The amount of these exemptions can change every year.  The amounts of the exemptions are doubled when a married couple files together.  For the exact amount of these exemptions, see CLAS’ fact sheet: Exempt Property under Ohio Law.  You may not lose your home or motor vehicle during your bankruptcy if your equity in the property is fully exempt.  If your home or vehicle is worth more than the exemption, there are still options.  You can agree to keep making your payments until the debt is paid in full.  Or you can pay the creditor the amount that the property is worth.  That may be less than you owe.

Can I own anything after bankruptcy? 

You can keep exempt property and property obtained after the bankruptcy is filed.  However, an inheritance, property settlement, or life insurance benefit received within 180 days after filing for bankruptcy may have to be paid to creditors.

Will filing bankruptcy affect my credit?  

A bankruptcy can appear on your credit report for ten years.  Since bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills.

What else should I know?

Utility services - Public utilities, such as the gas company, cannot refuse or cut off service because you have filed for bankruptcy.  The utility can require a deposit for future service.  You will have to pay new bills after bankruptcy is filed.

Discrimination - An employer or government agency cannot discriminate against you because you have filed for bankruptcy.

Driver's license - If you lost your license solely because you couldn't pay court-ordered damages caused in an accident, bankruptcy will allow you to get your license back, unless the damages were for death or personal injury as a result of a DUI.

Co-signers - If someone has co-signed a loan with you and you file for bankruptcy, the co-signer may have to pay your debt. If you file a chapter 13, you may be able to protect co-signers, depending upon the terms of your chapter 13 plan.

What does it cost to file? 

Currently, it costs $335 to file a chapter 7 bankruptcy and $310 to file a chapter 13, whether for one person or a married couple.  The court may allow payment of the filing fee in installments.  Attorney's fees are an additional cost.

Can I keep my tax refund? 

The bankruptcy trustee may want to use your refund to settle your debts.  Talk with your attorney about whether your refund is exempt.

Can I make purchases before I file for bankruptcy? 

You may purchase necessities.  However, you should not incur debt when you know you will be filing for bankruptcy.  Your creditors could claim that you are engaging in fraud.

How does the “Means Test” affect my bankruptcy? 

The “means test” compares your last six months actual household income to the median household income in your area.  Currently, the median household income is $43,978 for a household of one; $78,622 for a household of four and $8100 for each additional household member.  If your income is above the median household income, you cannot file a Chapter 7 bankruptcy.  If your household income is below the median, you can file either a Chapter 7 or a Chapter 13 bankruptcy. 

What are the time limits on filing bankruptcy? 

 You cannot file a chapter 7 bankruptcy if you received a chapter 7 bankruptcy discharge in the past eight (8) years.  Different rules apply for a chapter 13.  If you have filed a chapter 13 bankruptcy, you must wait six (6) years before filing for a chapter 7.

This article is meant to give you general information and not to give you specific legal advice. Prepared by Community Legal Aid Services, Inc.  Updated April 2015 CE-01-F003-CLAS