What Bankruptcy Can Do
Bankruptcy allows people struggling with debt to wipe out certain obligations and get a fresh start. The two primary bankruptcy types filedChapter 7 and Chapter 13 bankruptcyeach offer different benefits and, in some cases, treat debt and property differently, too. You’ll choose the chapter that’s right for you depending on your income, property, and goals.
Here are some of the things you can expect regardless of whether you file for Chapter 7 or 13.
Consider Other Options Before Filing For Bankruptcy
Before filing for bankruptcy, you should consider other alternatives that aren’t as drastic. Credit counseling, for example, might be a good option. In fact, before you can file bankruptcy, you must sign up for credit counseling from an approved credit counseling agency. The U.S. Department of Justice maintains a list of approved credit counseling agencies by state and judicial district on its website.
The CARES Act also suspends some federal foreclosure and eviction activity. There are new mortgage loan forbearance programs, too. These government initiatives might provide enough relief to keep your head above water until you can stabilize your overall financial situation, so be sure to check them out before filing for bankruptcy.
Another option is to take out a loan from your 401 plan instead of filing for bankruptcy. Generally, you can borrow up to half of your vested 401 balance, but no more than $50,000. If you’re affected by the coronavirus outbreak, the CARES Act lets you borrow up to $100,000 or 100% of your account balance until September 23, 2020. However, most retirement experts recommend this option only as a last resort, so you should proceed with caution before going this route.
The Advantages Of Chapter 13
A big advantage of Chapter 13 is that Chapter 13 debtors are given up to 60 months to make up past-due payments on loans secured by property that the debtor wants to keep. For example, if the debtor is 12 months behind on house payments, the debtor can force the lender to allow the debtor to pay the past-due amount over 60 months. Try getting a lender to agree to that outside of bankruptcy. Another big advantage of Chapter 13 is the ability to eliminate second mortgages on the underwater property. If the debtor’s primary residence is worth less than the first mortgage, Chapter 13 allows the court to eliminate the second mortgage and make it like a credit card debt. The debtor gets to eliminate a substantial debt on the house forever.
Another advantage of chapter 13 relates to debts that are not dischargeable. Some debtors like to use Chapter 13 to pay off taxes and court-ordered obligations without incurring any further penalties. Generally, taxing authorities and courts do not grant 60 months to pay off these obligations. For example, even with a tax debt that is not dischargeable, the debtor can have up to 60 months to pay off the tax without incurring any penalties from the taxing authority and without permission from the taxing authority.
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Mortgages And Debts Secured On Your Home
Youll need to keep paying your mortgage and any other debts secured on your home – for example, debts secured with a charging order. If you fall behind with the payments, bankruptcy won’t stop your mortgage lender from taking steps to repossess your home.
If you have an income payment agreement or income payment order , tell the official receiver you need to keep paying a secured debt. Ask them if you can pay less under the IPA or IPO so you can keep paying the secured debt as well.
If your home is repossessed and sold, but doesn’t raise enough money to pay off your outstanding mortgage or any other debt secured on it, the remaining debt known as ‘mortgage shortfall’ will no longer be secured. This means you’ll be released from it at the end of your bankruptcy. You’ll also be released from a mortgage shortfall if your home is sold at any time, even after your bankruptcy has ended.
Attend Your 341 Meeting
Your 341 meeting, or meeting of creditors, will take place about a month after your bankruptcy case is filed. Youâll find the date, time, and location of your 341 meeting on the notice youâll get from the court a few days after filing bankruptcy. Due to the COVID-19 pandemic, all 341 meetings are held either by video conference or via telephone until at least October.
The main purpose of the 341 meeting is for the case trustee to verify your identity and ask you certain standard questions and most last only about 5 minutes. Your creditors are allowed to attend and ask you questions about your financial situation, but they almost never do.
ââ You must bring your government-issued ID and social security card to the meeting. If you donât bring an approved form of both, the trustee canât verify your identity and the meeting cannot go forward. You should also bring a copy of your bankruptcy forms to the meeting, along with your last 60 days of pay stubs, your recent bank statements, and any other documents that your trustee has asked for. ââ
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How The Ontario Executions Act Can Help You Save Your Home
In 2015, the Ontario Executions Act was updated to define how much equity you could have in your home that would qualify for an exemption. If you have $10,000 or less of equity in your home, then you are not at risk of losing your home when you file for bankruptcy.
Equity is defined as the current market value of your home, minus the remaining balance on your mortgage, as well as any tax arrears and liens on the property. Lets say your home is worth $200,000. Your mortgage balance is $190,000 and you owe $1,000 in tax arrears, then you have $9,000 worth of equity. In this case, you would not be at risk of losing your home.
On the other hand, if your home is worth $200,000 and the remaining balance on your mortgage is $150,000 and you have no tax arrears, then you have $50,000 worth of equity. Your home would then be at risk of being seized and sold by the bankruptcy trustee.
Its important to consider your home and its equity before you file for bankruptcy. If you have equity in your home, then you may want to explore other options other than bankruptcy. Its in your best interest to avoid filing if youll lose your home.Explore Options to Avoid Bankruptcy
How Does Chapter 13 Work
Chapter 13 is the “Reorganization Chapter” for individuals. This means that debtors are able to eliminate certain debts and keep certain debts with more flexibility than Chapter 7. In Chapter 7, if the debtor is behind in payments, there is not much that can be done. Chapter 7 will just eliminate the debt and the asset will go back to the lender, regardless of how the debtor feels about it. In contrast, Chapter 13 allows the debtor much more flexibility regarding past-due debts.
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Requirement : Insufficient Income
The third requirement is where some people may start failing to meet the eligibility requirements. The Licensed Insolvency Trustee will look closely at your budget. If you cant afford to meet the monthly obligations on your debt, then the trustee will rule that you have insufficient income.
However, just because youre living paycheque-to-paycheque, it doesnt necessarily mean that the trustee will agree that you cant afford to pay your bills. If you have a range of discretionary expenses in your budget that you could cut, then you may not meet this requirement.
Chapter 7 Vs Chapter 13 Bankruptcy
The main difference between Chapter 7 and Chapter 13 bankruptcy is that in Chapter 13 bankruptcy, you don’t immediately erase any debts. You propose a repayment plan based on your ability to repay certain debts. The bankruptcy trustee and all creditors review the Chapter 13 reorganization plan and, if itâs acceptable to all involved, the court confirms your repayment plan, which lasts three to five years.
Most people file Chapter 13 bankruptcy instead of Chapter 7 for two reasons. First, they fail the means test due to their high income and donât qualify for Chapter 7 bankruptcy. Second, they own a home they want to keep thatâs not covered by the Chapter 7 bankruptcy exemptions.
If you’re considering filing Chapter 13 because you don’t pass the means test, look at the reasons you aren’t passing. The lookback period for the means test is 6 months, so if you recently experienced a drop in household income, you might qualify for Chapter 7 in the near future.
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What Happens To Secured Debts
A secured debt is a debt a creditor secures with an asset. A mortgage can be a good example here. When you buy real estate and finance that house with a bank loan, you are giving the bank the right to initiate foreclosure proceedings if you fail to comply with the mortgage terms.
In a Chapter 7 case, creditors can foreclose the property even after you file for bankruptcy if you don’t pay your secured debts. You can, however, keep the property if you make an agreement with the lender to continue making monthly payments on your loans.
In Chapter 13 cases, you can retain your property if you continue to make payments through the Chapter 13 payment plan.
What Debts Can’t Be Included In A Bankruptcy Filing
Certain types of debt cannot be eliminated by filing for bankruptcy. Even after you complete the bankruptcy process, you will still be responsible for repaying the following debts:
1. Secured debts, such as a mortgage or car loan
Secured debt are guaranteed by an asset , so you need to continue to make payments. Otherwise, your creditors can repossess your vehicle or your property.
2. Child support or alimony
These payments must continue even if you file for bankruptcy. If youre behind on your payments, your former spouse or partner will be considered a preferred creditor in your bankruptcy claim.
3. Student loans, if youve been out of school for less than seven years
If its been more than seven years since you were a full-time or part-time student, then student loan debt can be included in bankruptcy.
4. Any court fines, penalties, bail bonds or restitution imposed from a criminal or civil trial
5. Any debts arising from fraud, embezzlement or misappropriation
This includes any debt related to property or services obtained through fraud.
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Who Qualifies For Chapter 7 Bankruptcy Should I File
There is a difference between who is allowed to file and who should file.
Most people who earn under the median income for their state, based on their household size, are able to file. This is because they pass the means test according to bankruptcy laws. The means test takes into account your average monthly income over the last 6 months.
If you donât have a job or earn near the minimum wage, you will likely qualify for Chapter 7 bankruptcy. If you don’t pass the means test, you can file a Chapter 13 bankruptcy but not Chapter 7.
Folks looking for a fresh start typically fall into one of three categories:
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Those who should file for Chapter 7 bankruptcy right now
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Those who should wait a little bit of time and then file for Chapter 7 bankruptcy
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Those who should not file for Chapter 7 bankruptcy.
Saving Your Credit Score Is Only One Reason
An end to collection hell: Nosals study found that once people fell seriously behind on their debt with at least one account 120 days overdue, for example their financial troubles tended to get worse. Balances in collections and the percentage of people with court judgments grew.
By contrast, people who file for bankruptcy benefit from its automatic stay, which halts almost all collection efforts, including lawsuits and wage garnishment. If the underlying debt is erased, the lawsuits and garnishment end.
Freedom from certain debts: Chapter 7 bankruptcy wipes out many kinds of debt, including:
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Civil judgments .
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Past-due rent.
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Business debts.
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Some older tax debts.
Some debts, including child support and recent tax debt, cant be erased in bankruptcy. Student loan debt can be, but its very rare. But if your most troublesome debt cant be discharged, erasing other debts could give you the room you need to repay what remains.
Better access to credit: It can be difficult to get credit right after a bankruptcy. But Nosals study shows people who have completed bankruptcy are more likely to be granted new credit lines within 18 months than are people who fell 120 days or more overdue at the same time but didnt file.
Your credit limits after bankruptcy are likely to be low, however, and your access to credit like your credit scores wont recover completely until a Chapter 7 bankruptcy drops off your credit reports after 10 years.
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Filing Bankruptcy May Affect Your Credit For Years
Bankruptcy sticks with you for a long time. For example, it will stay on your credit report for up to 10 years. As a result, you’ll probably have a harder time getting a loan in the future because of a bankruptcy filing.
Also keep in mind that you’re limited on the number of times you can file bankruptcy. Chapter 7 bankruptcy can be filed once every eight years, while Chapter 13 can be filed every six years. So, if you do file for bankruptcy, make sure you do it right because it will be a while before you get another crack at it.
What Assets Are Exempt From Bankruptcy In Ontario
When you file for bankruptcy in Ontario, you dont need to be concerned that you will lose everything. These assets are exempt under federal and provincial law:
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Can The Court Deny A Discharge
In some cases, the bankruptcy court will deny a Chapter 7 discharge for a debtors lack of compliance with rules or procedure. For example, if you commit perjury, fail to account for lost assets, destroy records, or hide property to defraud creditors, the court may not discharge your debts, even though they are otherwise dischargeable. Moreover, creditors, the bankruptcy trustee, or the U.S. Trustee can object to your discharge. However, the bankruptcy court has the final say.
Discharges may be denied if you file bankruptcy too frequently within an impermissibly short window of time. For example, if you file successive Chapter 7 cases, you cannot receive a discharge in the second case if it is within eight years of the filing date for your first case. If you file successive Chapter 13 cases, you cannot obtain a second discharge within two years from the date you first filed for Chapter 13 bankruptcy.
When you are filing under two different chapters, the order determines how long you must wait to receive a discharge in the second case. For example, if you file for Chapter 13, you cannot file under Chapter 7 and receive a discharge within six years from the date you filed your Chapter 13 case, with certain exceptions. If you file Chapter 7 and receive a discharge, you cannot receive a second discharge in a Chapter 13 case filed within four years of your Chapter 7 filing.
Chapter #8 What Can Bankruptcy Do For You
_____ Gets rid of as many bills as possible.
_____ Does not affect car payments if you keep the car and continue payments.
_____ Stops all calls and letters from bill collectors.
_____ Gets rid of cars you don’t want.
_____ Stops interest on charge cards.
_____ Clears credit report except for bankruptcy listing.
_____ Allows you to raise your credit score.
_____ Lets you get a fresh start.
_____ New credit, including VISA & MASTERCARD, possible.
_____ Helps you catch up on house and car payments.
_____ Lowers interest on furniture and appliance payments.
_____ Stops interest on taxes due.
_____ Solves driver’s license suspensions from automobile accidents.
_____ Allows you to start a savings plan immediately.
_____ Stops garnishments and wage assignments.
_____ Never pay another old debt again.
_____ Stop all calls from collectors.
_____ Stops lawsuits immediately.
_____ Employer doesn’t know about it.
_____ Filing Chapter 7 allows immediate car loans.
_____ You can even buy a house during a bankruptcy.
_____ Allows you to start saving for a house.
_____ Money used to pay charges can now pay current expenses.
_____ Keep all your personal belongings and furnishings .
_____ Protect your assets from lawsuits and attachments and garnishments.
_____ Get out of leases.
_____ Clear up past due utility bills–only a deposit needed to restart service.
_____ All negative credit reports before bankruptcy are cleared.
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Debt That Can’t Be Forgiven
While bankruptcy can eliminate a lot of debt, it can’t wipe the slate completely clean if you have certain types of unforgivable debt. Types of debt that bankruptcy can’t eliminate include:
- Most student loan debt .
- Court-ordered alimony.
- A federal tax lien for taxes owed to the U.S. government.
- Government fines or penalties.
What Happens To Your Bank Account
When the bankruptcy order is made, you must:
- make sure you dont use your bank account
- give your cards and cheque books to the trustee
Your bank account will be frozen. Any money in your account will be an asset and claimed by the trustee. The trustee can ask to release some money:
- for your daily living needs
- to the other person in a joint account
The bank is allowed to use money from one of your accounts to pay your debts on another account you hold with them. This is called set off.
Otherwise, money owed to the bank is a bankruptcy debt, so you cant pay this to the bank directly. The exception is if the bank has a charge on your home .
Open a new account
You can open a new bank account after the date of the bankruptcy order but you must tell the bank or building society that youre bankrupt. Some banks will let you use your old account after theyve spoken to the trustee.
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