Bankruptcy is the legal court process to eliminate some types of debt.
The major benefit of bankruptcy is the elimination of debt. Bankruptcy can also:
- Pause foreclosure on your house. Bankruptcy temporarily pauses foreclosure proceedings. So, a bankruptcy could give you time to negotiate a payment plan.
- Stop debt collection actions. Bankruptcy can stop wage garnishment and bank attachment.
- Restore utility service. Bankruptcy can restart utility service.
- Restore your driver’s license. Bankruptcy can help you restore your driver’s license if you lost it because you couldn't pay court ordered damages from a car accident. Under Ohio law this is called a judgment suspension.
However, bankruptcy cannot fix all debt problems. Bankruptcy cannot:
- Discharge all types of debt. Some types of debts are not eligible for bankruptcy (like back taxes or child/spousal support.) Some debts like student loans are hard to discharge in bankruptcy. To discharge a student loan, you must prove that the loan causes an undue hardship. It is difficult to prove undue hardship. So, most people are not eligible to discharge their federal or private loans through bankruptcy.
- Protect cosigners. If you discharge a debt, your cosigner may still have to pay it.
- Discharge debts acquired after you file for bankruptcy. Bankruptcy only applies to debts acquired before you file. However, if you earn an inheritance, property settlement or life insurance benefit within 180 days of filing, you may have to give the money to your creditors.
When you file for bankruptcy, creditors must wait until a federal court decides what to do. This wait is called a “stay.” The federal court may discharge some or all of your debt. Or, the federal court may help make a plan to repay your debt.
Types of bankruptcy
The two most common types of bankruptcy are:
- Chapter 7. Chapter 7 bankruptcy is designed to give low-income people a fresh start by eliminating most unsecured debt, and preventing collectors from pursuing the debt. To file for Chapter 7 bankruptcy, your household income must be below the median household income. To find the median household income for your household size, visit the Office of the United States Trustee’s website.
Chapter 7 bankruptcy does not discharge all types of debt. Chapter 7 bankruptcy cannot eliminate debts including taxes, child support and most student loans.
One of the most common questions people ask is - will I lose everything if I file for bankruptcy? If you file for Chapter 7 bankruptcy, you may lose your property. But, some property is “exempt,” so it will not be sold to repay creditors. You get to keep exempt property. See below for details about exempt property.
- Chapter 13. Chapter 13 bankruptcy is more complicated than Chapter 7 bankruptcy. Chapter 13 bankruptcy is used when you have regular income. Chapter 13 bankruptcy may allow you to keep your property (like a house or vehicle) by creating a new plan for you to pay your debt over time.
Chapter 7 exemptions
If you file for Chapter 7 bankruptcy, exemptions can protect property from being taken. The most common exemptions are:
- Home equity. You can protect up to $145,425 of the equity in the home where you live. This exemption is also called the homestead exemption. Generally, in a Chapter 7 Bankruptcy, the federal court will not sell your home if your equity is less than the exemption amount.
- Car equity. You can protect up to $4,000 of the equity in your car.
- Cash. You can keep up to $500 in cash.
- Jewelry. You can keep up to $1,700 of jewelry.
- Tools of your trade. You can keep up to $2,550 worth of tools of your trade. Depending on your work, this could include books, computers, or hand tools.
- Household goods. You can keep up to $13,400 worth of household items. Each individual item must be worth $625 or less.
- Aggregate property. You can keep up to $1,325 worth of other items. This exemption is sometimes called the “wild card” because you can use it as an add on to the other exemptions.
- Awards for bodily injury. You can protect up to $25,175 in awards for bodily injury.
- Medically necessary health aids. You can protect your professionally prescribed or medically necessary health aids.
- Insurance. You can protect up to $5,000 in beneficiary funds, and you can keep life insurance or endowment insurance or annuities. You can keep your group insurance policy.
- Spousal support and child support. You can keep your spousal support, child support, an allowance or a reasonable amount of other maintenance.
- Earned Income Tax Credit (EITC) and Child Tax Credit (CTC). You can keep your refunds from the EITC and CTC.
- Retirement accounts and education accounts. You can protect your IRA, Roth IRA and Individual Retirement annuity. You can also protect your 401(k) and 403(b) accounts. In addition, you can protect your 529 account.
- Private and public pensions. You can protect your private and public pensions.
The amounts of the exemptions are doubled when a married couple files together.
Filing for bankruptcy
If you want to file for bankruptcy, you should speak to a lawyer to discuss your options. Bankruptcy is complicated and difficult to handle without a lawyer, especially if you want to protect your home and car. Some lawyers specialize in bankruptcy law. You may qualify for help from your local legal aid.
If you are low-income you may be able to file at no cost through Upsolve. Upsolve is a non-profit website that helps people file bankruptcy.
Bankruptcy is not for everyone because it does not cover all types of debt, and it may have consequences. It stays on your financial record for ten years, and it may significantly lower your credit score. So, it’s a good idea to consider if other options may be better. A non-profit credit counselor can help you understand your debt and potential payment options.
Avoiding bankruptcy scams
Some scammers charge money to “fix” credit or debt, but they actually take your money and do not help you. Avoid scams by getting legitimate information from experts like bankruptcy lawyers, legal aid or non-profit credit counselors.