Five Things Everyone Should Know About Bankruptcy

1. Congress Did Not Abolish Chapter 7 Bankruptcy.

Almost every person I talk to asks me if, didn’t during Congress do away with chapter 7 bankruptcy when they change the laws back in October 2005. The plain and simple answer to this question is no, Congress did not abolish chapter 7 bankruptcy. Most legal scholars will agree that the changes to the bankruptcy law made during 2005 eroded some of the protections the debtor had in bankruptcy and further limited some of the debts that can be discharged in bankruptcy. Congress also added the Means Test to bankruptcy and added a number of provisions to the bankruptcy laws that unfortunately made it more cumbersome and expensive forward individual to obtain a bankruptcy discharge.

2. The Means Test Is More Than Just A Number.

In its simplest form the means test is a comparison of one’s personal income, to the median income of a similarly sized household in the state in which one resides. If one’s income is below the average then they "pass" the means test and they are eligible for Chapter 7 bankruptcy.

But, even if one's income is above the median income of a similarly sized household, it is still possible qualify for Chapter 7 relief. The means test contains in it various deductions for living expenses and repayment of certain types of debts, such as mortgage payments, car payments, and taxes. When calculated and deducted from one's gross income, these deductions often make it possible for an individual who is above median income to qualify for Chapter 7 bankruptcy. One should never determine their eligibility for bankruptcy based upon their gross income only.

Regardless of all this, and individuals income looking forward from the day they file bankruptcy is as important as anything in determining your eligibility for Chapter 7 or Chapter 13. There are many situations in which an individual would not qualify under the means test, but because they are facing a substantially reduced income going forward, they can still file for Chapter 7 relief.

3. Filing Bankruptcy Is A Way To Protect Your Wages, Your Property, And Sometimes Both

One of the greatest myths that I talk to people about daily is the myth that bankruptcy robs your property or your wages. This belief is plainly wrong. First of all, every state has established a set of exemptions in bankruptcy. Exemptions are a listing of property a person cannot keep when they file bankruptcy. Exemptions vary by state. However, in Ohio, bankruptcy exemptions allow a person to keep substantial equity in the home in which they live, substantial equity in a motor vehicle, most household goods, as well as retirement assets, wages owed to you, and some cash. For many people the exemptions allowed in bankruptcy mean they lose nothing at all when they file.

The second thing to remember is that bankruptcy called "a filing for protection" for a reason. For the consumer, important aspect of bankruptcy is to understand the mechanics of each type of bankruptcy differ dramatically and that each bankruptcy is designed to protect different types of assets. One can often think of chapter 7 bankruptcy as income protection. One can understand chapter 7 in this light. Under chapter 7 I am willing to give to the bankruptcy court anything that is not otherwise covered by my exemption and in exchange I will get rid of my debts and keep all of my future earnings. In other words, if a person has assets in excess of what they are allowed to keep under their states exemption laws they are saying they are willing to surrender the property to the bankruptcy court in exchange for a release of indebtedness and the ability to keep all of their future earnings.

By contrast, one can understand chapter 13 bankruptcy as the opposite of chapter 7. Think of chapter 13 bankruptcy as asset protection. One is saying to the bankruptcy court that it may not matter if my assets are covered by my exemptions. But, in exchange for keeping all of my assets I am willing to turn over some of my future earnings to the bankruptcy court, for specified period of time, and in exchange I will keep everything I own. This type of protection can be very important because unlike chapter 7 chapter 13 can be used to cure mortgage arrearages were payoff automobiles that one might not be able to keep in chapter 7.

Chapter 13 can also provide the consumer with other benefits such as forcing creditors to take reduced payments on such things as motor vehicles and forcing a creditor to accept payments on a delinquent mortgage payment. These aspects of chapter 13 can allow a person to keep items that they might not otherwise be able to afford to keep if they chose to file bankruptcy under Chapter 7.

4. You File Bankruptcy On Yourself.

Many people ask if they can file bankruptcy against a particular creditor and not against some other creditor such as their home mortgage lender or motor vehicle lender. By this question people are often asking can they keep their house or their car but get rid of their other debts. The answer to this question is often yes, however there is a better way to understand how bankruptcy works.

When we understand bankruptcy as filing "against" a creditor it is often very confusing and seemingly impossible to understand why you could file against one creditor but not another. This can lead to many misconceptions such as, "you can’t file bankruptcy on a government debt" or "you cannot file bankruptcy on medical bills."

A better way to understand how bankruptcy works is that when a person files a petition for protection in bankruptcy they are making a request to the bankruptcy court to do something for them individually. They are asking the court to grant a permanent injunction that prevents creditors from ever collecting a debt. The effect of this injunction is to provide the individual a permanent release from indebtedness As a requirement to get this permanent release from indebtedness you must tell the bankruptcy court about every debt you owe to everyone, regardless of who the debt is owed to, the reason you have the debt, or how much you owe on the debt.

5. Most Debts Can Be Discharged In Bankruptcy

Most debts can be discharged in bankruptcy. But, like everything in life there are always exceptions. One reason some debts cannot be discharged in bankruptcy is that it prevents a person from profiting from their wrongdoing. For example debts that are accrued and based in fraud or deception cannot be discharged in bankruptcy. Debts that arose because of someone's purposeful actions to hurt someone else cannot be discharged in bankruptcy. Indebtedness based upon someone's criminal activity likewise cannot be discharged in bankruptcy.

Other debts cannot be discharged in bankruptcy because as a matter of public policy congresses decided that this debt should always have to be repaid. For the consumer, chief among these, are such things as support obligations, student loans and taxes. But even student loans and taxes are subject to a bankruptcy discharge under the right circumstances. Unfortunately, a description of those circumstances is too involved in-depth for discussion in this article. Please consult an experienced bankruptcy attorney if you have questions about the discharge of student loans and taxes.