Brief Description of Chapters 7 and 13 Bankruptcy
A Chapter 7 bankruptcy fully discharges most unsecured debt. It is designed to give you a fresh start. ‘Secured debt’ is debt on which a lender has kept a right to claim the property if the debt is not paid. For example, the lender for a home loan will keep a mortgage on the house. If the debt is not paid, the lender can foreclose on the mortgage and force a sale of the house to pay the loan. The same applies to motor vehicles and other property on which a lender has taken a lien. If you have secured debts, you have to decide whether to continue to pay on the debt (which is called reaffirmation), pay the market value of the item (which is usually referred to as redemption) or have the secured item returned to the creditor.
A Chapter 7 bankruptcy cannot discharge all debt. For instance, spousal support and child support cannot be discharged. However, a division of property in a termination of marriage can be discharged. In general, student loans cannot be discharged. There are very limited exceptions.
In a Chapter 13, 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 the 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. That means a creditor or state court cannot take any further action on the debt without permission of the Bankruptcy Court. The stay will stop a foreclosure action or vehicle repossession, at least until the creditor obtains ‘relief from stay.’
Under either type of bankruptcy, a debtor may keep certain property through the use of exemptions. Under Ohio law a person may keep certain personal or real property and income because they are ‘exempt’ from attachment, garnishment or sale by a bankruptcy trustee. Some exemptions are ‘blanket exemptions.’ The exemption applies to the entire value. For instance, many benefit payments are totally exempt, such as SSI. Other exemptions cover the value of an item only up to a certain dollar amount. The amount of these exemptions can change every year. For the exact amount of these exemptions, see CLAS’ fact sheet: Exempt Property under Ohio Law.
A bankruptcy will stay on your credit report for 10 years. Many people wonder if filing a bankruptcy will have a negative effect on getting financial aid for schools or a bank loan in the future. A bank will probably review how you have handled your finances since you filed bankruptcy. So when your bankruptcy is finally discharged, be wary of taking on more debt than you can handle.
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 March 2015.