For most people, bankruptcy means two choices: a Chapter 7 liquidation or a Chapter 13 wage-earner repayment.
Under the first, most debts are wiped out. In exchange, the filer may have to sell or give up possessions or property. Property pledged as collateral for a loan may have to be sold or relinquished to pay the lender, or arrangements must be made to pay the lender.
What's exempt from sale or repossession varies by state.
In Ohio, one can claim as exempt up to $5,000 of equity in a home; $1,000 of equity in a car or pickup; $400 in cash; $300 each for a stove and refrigerator; $1,500 in household goods and furnishings (up to $200 per item); $1,500 for jewelry, and $750 for tools of trade.
In Michigan, which allows more generous federal guidelines, filers can exempt up to $18,450 of equity in a home; $2,950 of equity in a car; up to $9,850 of equity value in a life insurance policy; $9,850 for household goods and furnishings (up to $475 per item); $1,225 for jewelry, and $1,850 for tools of trade.
Chapter 7 immediately stops creditors from garnishing wages, emptying bank accounts, repossessing cars or homes, or cutting off utility service or welfare benefits. A court-appointed trustee assumes legal control over some possessions and debts, and nothing can be sold or paid without the trustee's consent.
Such a case usually takes four to six months, costs about $200 in fees, involves one trip to the courthouse, and requires filling out a two-page petition and other forms describing, among other items, property sold or given away the previous two years.
Debtors cannot file again for Chapter 7 protection for six years.
Under Chapter 13, the filer can keep all assets, but a repayment plan is set up to cover all debts over a period up to five years. In Ohio, judges usually require a filer not to take on new debt over $1,000 without court permission.
To qualify, the filer must have regular income, unsecured debts such as credit card bills of less than $307,675, and secured debts, such as mortgages, of less than $922,975. Otherwise, Chapter 7 must be used.
A filer remains in Chapter 13 for the duration of the repayment plan. If payments cannot be made, the filer can ask to convert the case to Chapter 7, or have payments lowered or modified, or seek a "hardship discharge" that wipes out remaining debt.