There are Two (2) Types of Consumer Bankruptcies
Chapter 7 Bankruptcy
Chapter 7 is often referred to as the “fresh start” bankruptcy because your unsecured non-priority debt (i.e. credit cards, medical debt, old utilities, personal loans, pay day loans, money judgments, etc.) will be 100% discharged, meaning you will no longer be legally responsible for them.
You must qualify under the “means test” to receive a discharge in a Chapter 7 bankruptcy. You will need a full 6 months of all income from all sources and the number of persons in your household to determine if you qualify under the means test. More information may be required from you if you exceed the income threshold figure for the number of persons in your household.
Chapter 7 is also called “liquidation” because once you pass the means test, the Trustee will see if there is any unprotected equity in your assets that may be used to pay your unsecured creditors. Your bankruptcy attorney will be knowledgeable regarding the state of Ohio exemptions. There are numerous Ohio state law exemptions that are used to protect the equity in your assets. In most cases, you are able to keep your assets, but it is imperative that this application of exemptions is performed correctly. The entire process for a Chapter 7 takes about four to five months from the date of filing your bankruptcy petition and schedules.
Chapter 13 Bankruptcy
Chapter 13 is often referred to as “reorganization” bankruptcy. Based on your financial ability to pay according to a repayment plan, you will be paying some or all of your creditors over a 3 to 5 year period. You keep your assets in a Chapter 13 Bankruptcy, but the unprotected equity in your assets is used to increase your plan payments. This is commonly referred to as the “best interest” rule. Be mindful that each year the Chapter 13 trustee will examine your income tax returns, so minimize your income tax refunds each year.
Chapter 13 bankruptcy helps those who do not qualify for a Chapter 7 bankruptcy. It is also for those who wish to keep their home but has mortgage arrears. Chapter 13 is also utilized for those who have student loans and unpaid tax debt. Your budget, income, and overall feasibility of your Chapter 13 Plan is analyzed to determine what you are required to pay back to your creditors.
Court Costs
Currently, Chapter 7 court costs is $335.00 and Chapter 13 court costs is $310.00. Depending on the specific court you are filled in, you may be able to pay your court costs over a 120 day period after you file your case. This allows you to be able to get your bankruptcy case filed more quickly. You do not want to miss your filing fee installments to the Clerk of Court as the Bankruptcy Court will dismiss your case if you fail to pay your court costs timely.
Attorney Fees
In Chapter 7 Cases, attorney fees must be paid in full prior to filing your case. The typical range of attorney fees is $1,000 to $1,400. At Sheppard Law Offices, we charge $1,200 for attorney fees in nearly all Chapter 7 cases. There are some instances depending on the complexity of the case where we charge $1,400. You should always know what your attorney fees and costs will be before you engage a bankruptcy attorney. A written fee agreement must always be executed between your attorney and you.
At Sheppard Law Offices, we accept payment plans. The retainer in all cases is $400.00, which is part of the overall attorney fees. The remaining balance is paid by you at your discretion. We put no pressure on our clients when it comes to their payment plans as we understand each client’s situation is unique. It is crucial to know that we do not file your case until the full amount of the attorney fees are paid.
In Chapter 13 cases, attorney fees are partially paid up front with most of the attorney fees paid through your Chapter 13 Plan. Most attorneys follow the “no look” fee arrangement, which is set forth by the local rules and orders of the specific jurisdiction where you file your bankruptcy case. At Sheppard Law Offices, we follow the “no look” fee arrangement in every jurisdiction.
Currently, the “no look” fee in the Southern District of Ohio is $3,500.00. We request $1,000.00 to be paid up front with the remaining $2,500.00 paid through your plan. The “no look” fee in the Northern District of Ohio (Akron) is $4,000.00. We request $1,000.00 to be paid up front with the remaining $3,000.00 paid through your plan. The “no look” fee in the Northern District of Ohio (Canton) is very complex. Depending on your case, the “no look” fee is either $2,425, $2,725, $3,300, or $3,600. We request $600 to be paid up front with the remaining attorney fees paid through your plan. Once again, the retainer is still $400.00 and a payment plan is still available as discussed above.
What to Expect at Your Free Initial Consultation
At Sheppard Law Offices, your initial consultation is free. It may take 30 minutes to an hour to review your specific situation. If you have any documents such as lawsuit or garnishment paperwork you wish to have your attorney review, please bring it with you. You are not required to bring anything with you. You should have a general idea of what your assets, debts, and income are. Our goal is to get a big picture of what you are facing. We will review various options with you. We will discuss our fees with you in detail and the bankruptcy process. If you have existing creditor problems such as an impending wage garnishment or a court date fast approaching, we will advise you how to handle that matter. We will answer all of your questions. You should expect a non-judgmental, friendly atmosphere at our offices.
Before You File Bankruptcy Stop All Usage of Your Credit Cards
You should only pay for things by cash, check and/or debit cards once you decide to file for bankruptcy. It is fine to use your debit card or write a check, but the use of credit cards or obtaining a personal loan just before you file for bankruptcy gives the appearance of fraud. A creditor can object to your bankruptcy if there is any appearance that fraud has taken place. Your bankruptcy attorney will discuss with you the proper uses of your money prior to filing bankruptcy. The term “reasonable and necessary” expenses will be discussed. If you have to obtain a loan or have credit extended to you of more than $500.00 you must contact your attorney before you enter into the loan or credit transaction.
What Is Going to Happen to My Vehicle?
People will often ask me, “When should I stop paying on my credit cards?” My response is “as soon as you know you expect to file bankruptcy, you need to stop paying your unsecured debt.” Keep your bills and invoices you get in the mail and give them to your attorney. At Sheppard Law Offices, we cross check those bills, invoices, etc. with your debts listed on your three major credit reports that we obtain for you.
Further, at the Meeting of Creditors, the trustee will ask you, “Have you paid a total of $600.00 or more to any one unsecured creditor in the 90 days before you filed for bankruptcy?” Your answer needs to be “No.” The trustee has the authority to retrieve money you paid to any unsecured creditor. Further, by not paying your credit cards, you are freeing up money for you and your family. The purpose of bankruptcy is to give you relief, not just at and after the time you file, but even beforehand as well.
Stop Paying Unsecured Debts (credit cards, cash advances, personal loans, medical bills)
If any loan you wish to get is more than $500.00 you must speak with your bankruptcy attorney before you obtain the loan. Your goal should be to live on a cash basis. However, there are times when it is necessary to incur a new debt right before you file bankruptcy, such as the need for a more reliable vehicle.
Do not obtain any personal loans, cash advances, or new credit cards
If you wish to keep your house and/or vehicle(s), you should be current on those secured debts at the time you file bankruptcy. This is a good rule of thumb to follow, but our bankruptcy attorneys can give you more specific advice on a plan of action that meets your specific situation. The same principle also applies to secured loans and/or leases of furniture, appliances, and jewelry. These secured creditors, in most cases, will want you to either reaffirm the secured loan or assume the lease in a chapter 7 bankruptcy. You do have the option of surrender as well.
In a chapter 13 bankruptcy, by being current on certain secured debt, you are permitted to pay those debts outside of your chapter 13 plan, which saves you money by avoiding trustee fees. If you are in arrears on your mortgage or any personal property, and you plan on keeping these assets, you will have to include them in your Chapter 13 plan.
Surrendering Your Vehicle vs. Reaffirmation vs. Redemption vs. Cram-Down
Prior to filing bankruptcy, you are permitted to surrender your vehicle. Keep insurance on your vehicle until the time you surrender your vehicle. Do not pay any deficiency on your vehicle. You can wait until after you file bankruptcy to surrender your vehicle as well. You are permitted to obtain another vehicle prior to and after you file for bankruptcy. Communicate with your attorney before you purchase or acquire another vehicle.
In a Chapter 7 bankruptcy, you can either surrender, reaffirm, or redeem your vehicle. Reaffirm simply means that you continue making your vehicle payments as you have been doing. The secured loan that existed at the time of your bankruptcy will continue to be in effect during and after your bankruptcy. You must be current on your vehicle loan in order to reaffirm the vehicle loan. Your lender and you will enter into a reaffirmation agreement that provides for the exact same terms of the existing loan.
Redemption can be thought of as refinancing your vehicle loan to the current fair market value of your vehicle as opposed to what you actually owe on it. That excess debt is discharged in your Chapter 7 Bankruptcy. At Sheppard Law Offices, we refer our clients to 722 Redemption, a company that promptly determines whether you are eligible to redeem your vehicle. If approved, a motion to redeem is filed with the bankruptcy court and once an order is rendered by the bankruptcy judge a new vehicle loan is executed.
In Chapter 13 cases only, you may be permitted to “cram-down” the amount owed on your vehicle as well as the interest rate. The fair market value of your vehicle at the time of filing bankruptcy determines the secured portion of your vehicle debt, and the excess debt is treated as unsecured. Currently, the till rate of 6% is allocated to the secured portion of the vehicle debt and there is no interest allocated to the unsecured portion. In order to implement the cram-down provision, your secured loan must have been issued more than 910 days prior to you filing for Chapter 13 bankruptcy.
Continue Making Regular Payments on Assets You Want to Keep (house and vehicles)
Do not pay back any family member or friend any money or property
As money is being freed up for you as you begin the initial stages of preparing to file for bankruptcy relief, you cannot pay back any relatives or friends any money or property owed to them by you. This is called a “preferential payment”, meaning that you are preferring to pay them money or property back at the exclusion of your other creditors. A trustee may pursue an adversarial proceeding against you and them if you do so. Speak with your attorney before ever repaying relatives or friends.
Do Not Sell, Gift, or Transfer Away Any of Your Assets
There is a two-year look back rule for transferring assets. That means that if you try to switch the title to a vehicle into someone else’s name, and then file bankruptcy, you risk your discharge of being denied. In other cases, the trustee will seek to recover the value of the sale/gift/transfer from you and deny you an otherwise permissible state law exemption. Keep the status quo. And don’t do anyone a favor by putting something into your name like helping a friend out by putting a motorcycle into your name.
You Must Attend a Meeting of Creditors
There is generally only one hearing that you must attend in either a Chapter 7 or Chapter 13 bankruptcy. Approximately 30 – 45 days after you file for bankruptcy you will attend a Meeting of Creditors. This hearing is not in front of the Bankruptcy Judge or in a court room. It is conducted by an appointed Trustee. The hearing lasts about 5-10 minutes. It is an opportunity for creditors to appear and ask you questions, but they rarely ever show. The trustee will verify the information contained in your petition and schedules. Your attorney will handle all of the document submission (such as tax returns and proof of income) to the Trustee and the Court prior to the Meeting of Creditors. The Meeting of Creditors is not adversarial.
You Generally Do Not Have to Attend Your Chapter 13 Confirmation Hearing
After your Meeting of Creditors in a Chapter 13 case, one or more confirmation hearings take place with the goal to get your Chapter 13 Plan confirmed. Your counsel, the trustee, and possibly any creditor work together to finalize your plan so it can be confirmed by the Bankruptcy Judge. Issues that may arise include the proper classification and/or treatment of a creditor, valuation as to your property, whether your expenses are reasonable and necessary, and whether your income is correctly stated. You will generally not need to attend any of these confirmation hearings, but you should consult with your attorney nonetheless.
Do not hide things from your bankruptcy attorney
Your attorney is there to help you and if he or she doesn’t know something vital about your situation, a surprise later could cause you more harm than if you would have just been honest with your attorney in the beginning.
You Must Have All of Your Tax Returns Filed Before You File Bankruptcy
You are not permitted to file for bankruptcy unless all of your required federal, state and local tax returns are filed with the proper taxing authorities. You do not have to have them paid in full or engaged in any repayment plan; they just have to be filed. At Sheppard Law Offices, we offer tax preparation services through our Supervised Tax Return Preparer, Kenneth L. Sheppard, Sr.
If you have a history of not filing your tax returns, we can also help you to determine which tax returns are required to be filed through our IRS Investigation Service and State of Ohio Statement of Condition Request.
Some Debts Generally Not Dis-chargeable
Certain debts such as taxes, child support, spousal support (alimony), and student loans are unlikely to be discharged in bankruptcy.
Child support and spousal support (alimony) are court ordered payments that must be made to the obligee by the obligor regardless of whether a bankruptcy is filed by the obligor. Public policy favors the principle that the obligor should not be permitted to eliminate his or her responsibility by just filing for bankruptcy. If that injustice were allowed, many obligors would file for bankruptcy protection for that reason alone.
What Tax Liabilities May Be Dis-chargeable
Sales tax, employer withholding (payroll) tax, and other trust fund taxes are not dischargeable in bankruptcy.
There is a common misconception that income taxes are not dischargeable. Income taxes may be dischargeable in Chapter 7 cases and treated as unsecured non-priority debt in Chapter 13 cases if:
- The income tax returns were filed more than 2 years before the debtor filed for bankruptcy;
- The tax liability was assessed more than 240 days before the debtor filed for bankruptcy;
- The tax liability relates to a period more than 3 years before the debtor filed for bankruptcy; and
- No Notice of Federal Tax Lien or state tax lien was filed.
Student Loans May Be Dis-chargeable If Undue Hardship Exists
In bankruptcy, student loans, whether private or public, are not dischargeable unless you can prove an undue hardship. The Brunner Test is used to determine whether an undue hardship exists:
(1) You cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans;
(2) Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
(3) You have made good faith efforts to repay the loans.
Partial or full discharges of student loan debt may result in cases. An adversarial proceeding must be commenced after you file for bankruptcy to attempt to discharge your student loans under this legal theory.
What About My Income Tax Refunds?
Income tax refunds are part of your bankruptcy estate. There are state law exemptions available to protect your income tax refunds. These include the Earned Income Tax Credit, the Additional Child Tax Credit, the Cash on Hand Exemption, and the Wildcard Exemption. A good rule of thumb is to file your income tax returns first before you file for bankruptcy. You should receive and spend your income tax refunds on reasonable and necessary living expenses. Keep receipts and canceled checks of your expenditures as the trustee will most likely wish for you to hand over a copy of those receipts and canceled checks to the trustee for verification.
The timing of filing bankruptcy is the main issue when it comes to unprotected income tax refunds. Every year starting around September or October and going through April of the following year, trustees, especially Chapter 7 trustees, are on the look-out for potential and actual unprotected income tax refunds. If you are not aware of this potential pitfall, then you could easily be required to turn over your income tax refunds. It’s better to receive your refunds and spend them properly first than to have a trustee take them from you.
