Bankruptcy Law Limits Filing Choices
Q: Is it true that the current bankruptcy law might affect what type of bankruptcy I might choose to file?
A: Yes. Your ability to choose may be limited by a “means test” you must now complete to determine the type of bankruptcy for which you are eligible. The “means test” form is now part of the consumer’s bankruptcy case filing and it compares your last six months of actual household income to the IRS median household income level for families of the same size in your area. If your household income, which may include contributions to your household by non-family members (boyfriend/girlfriend, parents, grandparents, etc.), is above the median, then your household expenses are examined as well. The household expenses you are allowed to use may be limited by IRS standards even if your actual household expenses are higher. If more than 50 percent of your debts are business-related debts, then you do not have to file a means test.
Q: How might the means test affect my bankruptcy?
A: If your household income is below the median, you can file either a Chapter 7 “straight liquidation” bankruptcy or a repayment plan Chapter 13 or a Chapter 11 bankruptcy. If, however, your income is above the median (assuming yours is a consumer debt bankruptcy), and your household expenses allowed by the means test result in excess income for your household, then you will not have the option of filing a Chapter 7 bankruptcy. Instead, you will be limited to filing either a Chapter 13 or Chapter 11 repayment plan.
Q: What are the differences between the types of bankruptcy?
A: In a Chapter 7 bankruptcy, a trustee is appointed, who may sell assets you own that may have non-exempt equity (such as real estate equity, a car with no loan against it, cash in the bank, or tax refunds) to pay some portion of your debts. The remaining amount of your debts are discharged (legally forgiven), although some debts, such as certain taxes, student loans, child support and spousal support, cannot be discharged.
In a Chapter 13 bankruptcy, you keep your property while repaying a portion of your debts over time with future income. Your repayment amount is primarily based on disposable income, net worth, and what the court finds to be reasonable.
A Chapter 11 bankruptcy is usually reserved for businesses or very high income or wealthy people. Most consumers file under Chapter 7 or Chapter 13. There is also a Chapter 12 bankruptcy that can be used by family farmers and fishermen. Bankruptcies filed under Chapter 11 or 12 do not require the means testing that is required for individuals filing under Chapter 7 or 13.
Q: Must I now go through credit counseling if I intend to file for bankruptcy?
A: Yes. You are now required to have two credit counseling sessions, one before filing your case and one afterward. You can complete them in person, over the phone or over the Internet. However, the sessions must be with a credit counselor that has been approved for bankruptcy counseling by the executive Office of the United States Trustee. If you complete the first credit counseling session and file a bankruptcy case, but do not complete the second session after filing, you will not receive your bankruptcy discharge.
Q: What happens during counseling?
A: Before filing for bankruptcy, you must review your bills and budget with a credit counselor who will discuss non-bankruptcy alternatives (called pre-bankruptcy counseling). The second counseling session (called debtor education) must occur after you have filed your case, but before the 45th day following your first scheduled hearing with the bankruptcy trustee (called a “Section 341” meeting). Debtor education involves a financial management course.
Q: What types of documents will I need when I file bankruptcy?
A: In addition to your pre-bankruptcy counseling certificate, you will need a record of the last six months’ income used to calculate the “means test,” including actual pay stubs received in the last two months before filing, and your last two to three years’ tax returns. Additionally, you may be asked to produce the following documentation:
• deeds, mortgages, motor vehicle and memorandum titles, as well as bank and investment account statements;
• any divorce or child support records, and records of any lawsuits or judgments; and
• the last couple of months of bills and a credit report (to ensure that all debts have been listed).
Q: When should I consult an attorney about bankruptcy?
A: You should consult with an attorney experienced in bankruptcy issues when you believe you will not be able to continue to pay your bills on time, have been sued on your debts, or are uncertain as to your rights concerning the debts you owe. It is best to consult with an attorney before you have missed many payments or before you have been sued. Depending upon your particular situation, your attorney can help you decide if it would be to your advantage to file bankruptcy or how to avoid bankruptcy.
This "Law You Can Use" legal information column was provided by the Ohio State Bar Association (OSBA). It was prepared by Columbus attorney Lloyd D. Cohen and Canton attorney Anthony J. DeGirolamo, and updated by Anthony J. DeGirolamo.