Bankruptcy Type Determines Timeline for Completion
Q: I am an individual experiencing financial difficulties. What are the differences between the types of bankruptcies I might consider?
A: Before deciding to file, you should consult a bankruptcy attorney to determine your options, including any alternatives to bankruptcy. Most individuals who proceed choose between a Chapter 7 bankruptcy (often called a "straight liquidation"), and a Chapter 13 bankruptcy, which is sometimes called a “wage earner’s plan.”
Q: What’s the difference between a Chapter 7 and a Chapter 13 bankruptcy?
A: Both Chapter 7 and Chapter 13 bankruptcies allow you to discharge certain debts such as credit cards. In a Chapter 13, you must make monthly payments, which are distributed to your creditors. A Chapter 7 bankruptcy does not require this, which makes it the more popular choice. However, a Chapter 7 bankruptcy is not available if your income exceeds certain limits.
In Chapter 7, you can often keep your home and your car. For example, if your mortgage is current and your house is worth less than what you owe your lender, you can usually keep your home. Even if your house is worth more than what you owe your lender, you may be able to keep it, depending on the amount of equity (the amount by which the value exceeds what you owe on your mortgage). If you have equity over a certain amount, the trustee appointed for you in your Chapter 7 proceeding may proceed to sell your home. This also applies to other assets. If you have assets that your trustee is able to sell to satisfy your debt, you may want to consider filing a Chapter 13 bankruptcy instead.
In a Chapter 13 bankruptcy, you make payments to the Chapter 13 trustee through payroll deductions, usually for either 36 or 60 months. A Chapter 13 bankruptcy allows you to keep your home, but you must resume your normal monthly mortgage payments and pay any arrearage (payments you missed) over time through your Chapter 13 plan. Also, if your mortgage is current, but there is equity in your home for bankruptcy purposes, a Chapter 13 proceeding allows you to keep your home if you pay the equity amount to your creditors in installments over time. A Chapter 13 bankruptcy can be useful if your income level is too high to allow you to qualify for a Chapter 7 proceeding.
Q: What is the timeline for a Chapter 7 bankruptcy?
A: Usually, you will first meet with your attorney to see if you qualify for a Chapter 7 proceeding, and if that is the best choice for you. Your attorney will ask you to bring financial documents such as pay stubs and tax returns. If you decide to proceed, the attorney will draft your bankruptcy petition, but before you can actually file the petition, you must take a credit counseling course, usually online or by telephone. After completing this course, you will meet with your attorney again to review your petition and sign it. Then, the petition is filed with the court electronically. About a month after the filing, you and your attorney will attend a “meeting of creditors” at the courthouse with your trustee and any creditors who wish to attend.
At this meeting, the trustee may ask you for more documents, such as copies of tax returns that have not yet been filed. Each creditor normally has two months after the meeting to file any objections to your request for a general discharge of debts or to the discharge of a specific debt. If no objections are filed in the two-month period, the court will enter the discharge. If your trustee requires nothing further, your case is closed and you are finished. If your trustee has assets to distribute, however, your case will remain open until your trustee completes his or her obligation to distribute money to your creditors. This can take many months.
Q: What is the timeline for a Chapter 13 bankruptcy?
A: The procedure for filing a Chapter 13 bankruptcy is similar to that for a Chapter 7. After the filing, however, the timeline is different. Completing a Chapter 13 bankruptcy plan will usually take either 36 or 60 months, depending on your income level. During those months, you will make payments to the Chapter 13 trustee, who will distribute the funds to creditors according to your plan. You will receive your discharge of debts when you complete your Chapter 13 plan.
Q: How long does a bankruptcy remain on my credit report?
A: A Chapter 7 or Chapter 13 bankruptcy normally remains on your credit report for seven to 10 years following your discharge. You can, however, begin to reestablish your credit immediately following discharge. For example, you can obtain a secured credit card by depositing $500 with your bank and receiving a credit card with a $500 limit.
This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by attorney Julie E. Rabin, a principal in the Cleveland firm of Rabin and Rabin LPA.