Welcome to 21st Century America. The government has gobs of money for the banks, the very people who are upping your interest rates, raising your minimum payments, and then harassing you when your budget won’t allow you to dance to their tune. The government doesn’t have a dime for you or your debts. Do you think your only option is to file for bankruptcy?
I want to explain to you what a bankruptcy is, and what it is not. If you think it is time to file a bankruptcy, chances are what you are thinking about is a Chapter 7. Before I begin there are a few terms that I need to explain to you so that you get a clear picture. Unfortunately I will have to use some 25 cent legal terms, but I will bring them back to earth quickly. First I want to tell you a story about a prominent Lorain County judge. He is one of a group of us who take lunch together each day. One day a new lawyer joined our little group. He spoke very proper English and used all the big law words we pick up in law school. The judge stopped the conversation and declared that we all have the same degree, we all know the secret handshake, and we don’t have to talk like lawyers all the time. I agree.
Secured and Unsecured Debt
There are two kinds of debt. Secured and unsecured. Secured debt is backed up with an asset. The asset is collateral for the debt. If you have a mortgage, it is secured by your home. If you have a car loan, it is secured by your automobile. There are a number of ways that a secured debt comes into existence, but that is a little much for this discussion, in fact it takes up an entire course in law school. Unsecured debt is just any ordinary reason you might owe money. It is an obligation that is not guaranteed with the value of an asset. Examples of unsecured debt include credit cards, medical bills, and utility bills. You get the idea.
Jurisdiction of the Bankruptcy Court
There are two types of jurisdiction, In Rem and In Personum. In Rem jurisdiction is jurisdiction over property. In Personum jurisdiction is just what it sounds like, jurisdiction over the person. Chapter 7 bankruptcy is purely an In Personum proceeding. That means that it will take away your responsibility to pay your debt which can be discharged under the law. Chapter 7 does not remove debt from property. It will not remove liens from secured debts such as mortgages and car loans. If you want to retain those secured assets you must make an arrangement to continue paying for them called Reaffirmation.
Will You Lose Assets?
A chapter 7 is officially known as “liquidation.” I know what you are thinking. You just want to be free of you bills. Nobody ever said anything to you about liquidating anything. This is how it works: When you file your case everything you own and everything you owe becomes part of a “bankruptcy estate.” The court grants an “Automatic Stay”. This stops your creditors and pending lawsuits cold. A case trustee is assigned to your case. In Cleveland all the trustees are lawyers, but they don’t have to be. You and I will appear for a meeting of creditors. It is the trustee’s job to examine you and your petition to determine if after applying the exemptions there are any assets worth more than the protected amount. If that is the situation, he gathers those things, liquidates them and distributes the funds to your creditors. He sends you the exempt value of the asset. Ultimately the court enters a discharge which replaces the automatic stay and the exempt property of the bankruptcy estate returns to your control.
Becoming concerned? Don’t worry because in my experience in Northern Ohio close to 95% of the bankruptcy cases filed are what are called “no-asset.” That means your dischargeable debts are gone and you keep all your property because it is exempt.
Chapter 13 Might Be Better for You
There are many steps that go into a properly done Chapter 7 Bankruptcy. Before filing your case, an experienced bankruptcy lawyer will already know if you have any assets at risk, and help you plan accordingly. One option is a Chapter 13 case. You keep those assets while at the same time having a plan filed with the court to pay you creditors as though the assets were liquidated in a Chapter 7. Chapter 13 is a complex topic for another article.