Bankruptcy is the means under the United States Constitution by which people and companies may obtain relief from their debts. Under the Constitution, Congress has been granted the ability to pass uniform laws on bankruptcy and, most recently, passed the Bankruptcy Code (Title 11 of the United States Code) in 1978. The Bankruptcy Code has been amended several times since 1978, with the most extensive changes made in 2005. There is, however, no constitutional right to relief, or a discharge, from debts. Bankruptcy relief is only available to the extent Congress provides.

The Bankruptcy Code provides for relief from debts either through a liquidation (Chapter 7) or reorganization (Chapters 11, 12, or 13). This pamphlet discusses some of the issues to consider before filing for bankruptcy and the differences between a liquidation case and a reorganization case. Before making any decision about whether to seek bankruptcy protection, a qualified bankruptcy lawyer should be consulted.

Q.: What types of bankruptcy relief are available?

A.: Individuals are eligible to file for bankruptcy under Chapter 7, Chapter 11, Chapter 12 or Chapter 13 of the Bankruptcy Code.

Chapter 7 bankruptcy is known as straight liquidation. In a Chapter 7 case, a trustee (assigned by the U.S. Trustee's Office or chosen by the debtor's creditors) may liquidate, or sell, the debtor's non-exempt assets to pay all or a portion of the creditors' claims.

Ohio law allows individuals to keep, or exempt, a small portion of the equity in certain property they may own. Typically, when estimating the amount of money that can be realized from the sale of a debtor's property, the bankruptcy trustee will subtract what the debtor is allowed to exempt (keep) plus any liens or mortgages on the debtor's property. Unless the money raised from the sale of the property is greater than these exemptions and any liens or mortgages, it will not be worth the trustee's while to sell the property. Any portion of debts not paid by the trustee (with certain exceptions) is discharged (eliminated), and the creditor cannot force the debtor to pay the remaining amount.

Chapter 13 bankruptcy, or individual reorganization, is an alternative to Chapter 7 that usually allows a debtor to keep his or her personal property. A Chapter 13 debtor must have regular income and meet certain debt and asset limits—less than $360,475 unsecured debts and less than $1,081,400 secured debts. (A debt is secured, for example, when the creditor has filed a mortgage against real property, noted a lien on a vehicle title, or otherwise holds a security interest. Typical unsecured debts are utility bills, bank credit cards, and health care bills.)

In an individual reorganization, the individual submits a plan whereby all of his or her disposable monthly income (income after providing for ordinary living expenses) is placed in a fund for the payment of creditors over a period of time (up to five years). The plan of reorganization is monitored by a Chapter 13 trustee and is supervised by the bankruptcy court. A Chapter 13 debtor must pay his or her creditors at least as much as they would be paid if the debtor's assets were liquidated in a Chapter 7 case.

Chapter 11 "reorganization" is typically used by corporations or businesses as an alternative to Chapter 7 liquidation. It is also available for individuals who do not satisfy the Chapter 13 debt and asset limits or do not wish to reorganize under Chapter 13. Since a Chapter 11 reorganization is a very expensive process, it is not frequently used by consumers. In a Chapter 11 reorganization, as in a Chapter 13 reorganization, the debtor may keep his or her property and pay creditors with future earnings according to a reorganization plan.

Chapter 12 is a special reorganization for family farmers. To qualify, a family farmer must earn most of his or her income from family farming operations.

Q.: When is it appropriate to file for bankruptcy?

A.: The decision to file for bankruptcy relief varies according to each debtor's unique situation. A person considering bankruptcy, whether personally or for a business, should consult with an experienced bankruptcy lawyer who can determine whether such an option should be explored and when it would be most beneficial to file.

Generally speaking, it may be appropriate to file for bankruptcy when an individual is unable to pay his or her debts and regular living expenses or when an individual has property (typically a house or car) that he or she wishes to keep from the reach of creditors.

Q.: How would I go about filing for bankruptcy relief?

A.: A bankruptcy is initiated with the filing of a petition with the appropriate bankruptcy court.  In addition to filing a petition, you will be required to provide the bankruptcy court with schedules of all your assets and liabilities. These documents would include a list of everything you own and everything you owe to creditors, as well as personal information about your employment and any transfers of money or property you may have made shortly before filing for bankruptcy. In a Chapter 7 bankruptcy, you would pay a $299 fee to file these documents, and in a Chapter 13 bankruptcy, the cost would be $274.

After these documents are filed, you, the debtor, will have a meeting with a trustee, which may be attended by your creditors.  The documents you filed will be checked for accuracy by the trustee assigned to the case. Also, the trustee and the creditors may ask you additional questions about your personal finances.

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Can a husband and wife file together for bankruptcy?

A.: Yes. It is possible, but not required.

Spouses can file a joint petition if they both need relief from their debts. However, depending on the circumstances, one spouse can file for relief under Chapter 7 or 13 and the other spouse may choose not to file at all or may file his or her own separate bankruptcy case. When spouses file separately, each spouse's assets and liabilities will be considered separately by the bankruptcy court.

Q.: Can the bankruptcy court deny a discharge of debts in bankruptcy?

A.: Yes. The filing of a bankruptcy petition does not guarantee the discharge of a person's debts.

The bankruptcy court may deny a general discharge of debts if an individual commits certain acts of misconduct before or after the bankruptcy petition, such as destroying, concealing, or removing assets that might otherwise be used to pay creditors. Also, a discharge of debts may be denied if the person has destroyed or concealed records that show what assets are available to pay creditors. Finally, the bankruptcy court may deny a general discharge if the debtor has lied under oath during the bankruptcy case, or refuses to answer questions without a good reason.

Aside from acts of misconduct, a person will not be granted a general Chapter 7 discharge if he or she has obtained a discharge in a Chapter 7 case within eight years, or a Chapter 13 within six years before the date that a second bankruptcy is filed.

Even if a discharge of debts is denied, an individual's assets may still be liquidated in a Chapter 7 case or the debtor will have to complete his or her plan in a Chapter 13 case. The denial of a discharge does not relieve a debtor from his or her other obligations under the Bankruptcy Code.

Q.: If a general discharge is granted, will any debts still have to be paid?

A.: Yes. Even if a general discharge is granted, some debts are not discharged in bankruptcy. Further, the type of bankruptcy affects what debts may be discharged. Generally, more debts are discharged in Chapter 13 than in Chapter 7. Congress provided for greater relief under Chapter 13 as an incentive to encourage repayment of debts through a reorganization plan.

Debts that might not be discharged in bankruptcy include taxes assessed within 240 days of the bankruptcy filing. Certain student loan debts, child or spousal support debts arising from a divorce, criminal fines and debts arising from a DUI, and any debt incurred because a debtor has committed fraud, breached a fiduciary duty as a trustee, or committed a "willful" act causing injury to a creditor also might not be discharged. The bankruptcy court must determine on a case-by-case basis which of these types of debts are to be discharged.

Q.: How would a bankruptcy discharge affect my credit record?

A.: It depends upon the facts and circumstances of your case. Of course, the bankruptcy will be noted on your credit record, but the effect of this notation depends upon whether a discharge was granted or the case was dismissed and what type of bankruptcy case it was (Chapter 13 reorganization or Chapter 7 liquidation). Also, individual creditors have differing policies regarding those who have filed for bankruptcy protection. What is certain is that your bankruptcy filing will appear on your credit record for up to 10 years, and most likely will cause you difficulty in obtaining loans, either because you will be denied a loan or because you will have to pay a higher rate of interest to secure one.

The information contained herein is general and should not be applied to specific legal problems without first consulting with one of our attorneys.


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