Bankruptcy in Cleveland Information

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Bankruptcy Umbrella in Cleveland, Ohio
Table of Contents
 

Overview of Bankruptcy

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The four chapters of bankruptcy available in Cleveland, Ohio

Bankruptcy is not new, even though you can’t pick up a newspaper, turn on the TV or surf the Web these days without encountering the word. The earliest mentions of the word date to the early 1500s. In the United States, the condition of bankruptcy is as old as the nation itself, being an early part of the Constitution (Article 1, Section 8, Clause 4). Various codes and acts have been utilized during the years since that time; including 1978, and more recently in 2005.

Every entity, from an individual person to a large corporation, may become bankrupt. This situation most often arises through no fault of the person or company – but may also be because of unwise handling of resources. The law finds little difference between them.

The archaic description of bankruptcy is: reduced to a state of financial ruin. Basically, when your outgo exceeds your income with no possibility of catching up in the foreseeable future, you are eligible to file for bankruptcy. Many ask whether they will have to relinquish certain assets during bankruptcy. In most cases, the answer is no

Bankruptcy protection is a right available to every United States citizen under Federal law. According to the U.S. Constitution, all bankruptcy matters are placed under Federal Jurisdiction and Congress is charged with enacting uniform laws on the subject. The Bankruptcy Code can be found in Title 11 of the statutes known as the United States Code. But not all law pertaining to bankruptcy is Federal. There are places in the Bankruptcy Code where federal law either is coexistent with, or defers to, state law.

Here in Ohio, state law plays a major role in bankruptcy cases, despite the fact that the proceedings take place in the United States Bankruptcy Court. For example, all exemptions applied to shield a Debtor's assets are determined strictly according to Ohio law. Although there is a regime of federal exemptions permitted in other states, Ohio's state exemptions are exclusive.

There are four chapters under which a Debtor may seek bankruptcy protection:

Chapter 7: Liquidation. This is the type of relief most consumers seek - a complete discharge of all unsecured debt, including credit cards and medical expenses. A case brought under this provision can be the simplest and quickest vehicle to a fresh start.

Chapter 11: Reorganization. This chapter is attractive mostly to corporations seeking to rehabilitate a business. However, it is also designed to assist individuals with substantial assets to reorganize their affairs. This chapter should be approached with caution since its provisions are complex and decisions thereunder best approached with the assistance of competent counsel.

Chapter 12: Family Farmer or Fisherman. This section of the Code allows family farmers and fishermen to enter into a repayment plan similar to a Chapter 13 Wage Earner Plan.

Chapter 13: Wage Earner Plan. This form of bankruptcy allows individuals with regular income to develop a repayment plan for all or some of their outstanding debt. It is especially attractive to Debtors wanting to hang onto major assets (e.g., a house or a car) that are in danger of foreclosure or repossession. There are also attractive features allowing for the recharacterizing of undersecured debt, like cramdowns on older vehicles and stripping of second mortgages.

Voluntary versus involuntary bankruptcy: This definition is rather simple: if the debtor petitions the bankruptcy court for relief, it is voluntary. If the creditors appeal for relief, the petition is involuntary. Fortunately, the latter is rare.

The most common cases filed in Bankruptcy Court fall under Chapters 7 and 13. Almost 70% of all bankruptcies are Chapter 7 cases. Corporations and wealthy individuals tend to file under Chapter 7 or Chapter 11.

Everyone’s particular financial challenges are unique. Therefore, it is wise to consult a competent bankruptcy attorney first before deciding on a strategy to deal with these challenges.

 

Brief Overview of Chapter 7

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Liquidation

Brief Overview of Chapter 7. When a Debtor chooses to liquidate under Chapter 7, he or she relinquishes all non-exempt property to a bankruptcy trustee. The Trustee, in turn, liquidates the property and distributes the proceeds (less his or her fee) to the Debtor's unsecured creditors. In return, the Debtor is relieved of some or all of his or her debt. There are exceptions to the general rule on dischargeability of unsecured debt. If the Debtor engages in certain types of criminal or fraudulent behavior (e.g., concealing records), he or she may not receive a discharge. And certain types of debt (such as child support) may not be discharged under any circumstances.

The value of property subject to exemption varies from state to state. Ohio's exemption regime is exclusive and the use of federal exemptions is not permitted.

As to the waiting period between bankruptcy cases, a Debtor must wait at least eight years after filing a Chapter 7 case before filing another Chapter 7 case (assuming there was a discharge of debt in the first case). However, that Debtor may file a Chapter 13 case at any time. All that matters in the second case is whether four years have passed since the first filing. If less than four years have passed, the Debtor can maintain the case but will not receive a discharge. Some Debtors jump into a Chapter 13 case after a Chapter 7 case for the sole purpose of saving their home from foreclosure.

But time alone is not the only consideration in deciding whether to file under Chapter 7 or Chapter 13. In 2005, Congress introduced a "means test" to determine whether a Debtor qualifies for Chapter 7 protection or must instead bring a case under Chapter 13.

 

Brief Overview of Chapter 13

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Wage Earner Plan

Brief Overview of Chapter 13. When filing a Chapter 13 bankruptcy, the Debtor may retain all of his or her possessions. The trade-off is that he or she must propose a plan (typically, for a 5-year period) that devotes a set amount of future income to pay down all or at least a portion of the accumulated debt. The amount of the monthly plan payment is calculated according to a variety of factors and is subject to several tests. The assistance of a competent counsel is strongly and openly encouraged by most bankruptcy judges.

In contrast to a Chapter 7 bankruptcy, a Chapter 13 debtor may retain his or her property regardless of whether or not it is exempt and the Debtor adheres to the provisions of the Plan. A Bankruptcy Court Judge will confirm a Plan as long as it is feasible, given the Debtor's financial situation, and sufficient funds are available for distribution to creditors. Creditors may object to a Debtor's proposed Plan, but otherwise have no say in the Plan's terms. Payments are made by Wage Order to the Chapter 13 Trustee's office, which then distributes the money in accordance with the Plan.

Once the Debtor has completed the terms of the Plan, the Court will order a discharge of all remaining unsecured debt. If the Debtor fails to adhere to the terms of the Plan, the Court may dismiss the case. The creditors, then, may resume their collection of their respective debts.

As to the waiting periods for filing a Chapter 13 case, two years must pass after filing an initial case under Chapter13 to pursue another 13 (assuming a discharge in the first case). Of course, this rule is probably meaningless since it is rare to get a discharge in a 13 within two years. If, however, a Debtor filed and received a discharge in a prior chapter 13 case, then the time limit for determining whether one qualifies for a Chapter 7 or Chapter 13 depends on the percentage of unsecured debt repaid in the first case. If more than 70% of total unsecured debt was paid in the Chapter 13 case, there is no waiting period to file under Chapter 7. Otherwise, a Debtor must wait six years after the first 13 to file for Liquidation (in most cases, this would be 1-2 years following discharge).

 

Brief Overview of Chapter 11

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Reorganization

Brief Overview of Chapter 11. In a Chapter 11 case, the Debtor retains his or her property and is referred to as a debtor in possession (or DIP.) DIP runs the day-to-day operations of the company while the parties work with a Bankruptcy Court to devise and complete a Plan. Once certain requirements are met (i.e., fairness among all creditors and priority of claims), creditors are permitted to vote on the Plan. If the Plan is ratified, then the Debtor continues to operate the business and simply pays its debt in accordance with the terms of the Plan. If a specified majority of the creditors do not vote for the plan, additional requirements may be necessary to confirm the Plan.

In all cases, an important shield against creditors is the automatic stay. This powerful feature automatically halts all repossessions, foreclosures, evictions and other debt collection activity.

 


NOTE:Disclaimer - Legal information is not legal advice

 
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