Will Bankruptcy Help You Catch Up on Past-Due Payments?

If you find yourself drowning in debt, you might be wondering whether bankruptcy would be the right choice to get you back on your feet and catch up on past due payments.  The answer is that it may very well be, depending on your entire financial picture and the type of debts you have.

 

Bankruptcy is a legal way for you to eliminate or restructure certain debts while under the protection of the federal bankruptcy court. The most common types are Chapter 7 and Chapter 13.

 

A Chapter 7 bankruptcy allows you to eliminate many types of debt quickly. However, it requires that you liquidate your assets, except for those that are exempt (see Ohio home exemption ).   A Chapter 13 bankruptcy allows you to reorganize assets and consolidate your payments to avoid fees and fines and repay some or all of your debt affordably over a three- to five-year period. If you successfully complete the court-approved payment plan, the debts covered by the plan are discharged and you can keep most assets.

 

In determining whether Chapter 7 or Chapter 13 bankruptcy is the best choice in your situation, you should ask yourself this question -- With your current income and debt levels, would you be able to afford the basic necessities such as food, shelter transportation, utilities, and clothing that you need and also have enough to pay off your debts within a 3- to 5-year period?

 

If the answer is yes, you might be best off with a Chapter 13 bankruptcy; by budgeting and spending wisely, you should be able to catch up on your past-due payments and resolve your debts during that period.  If your answer is no, then Chapter 7 bankruptcy would probably be your best option, since it eliminates many kinds of debts.

Discharge of Debts

When you file under Chapter 7, you can get a full discharge of all eligible unsecured debts such as medical bills and credit card debt. Ohio allows you exemptions which may let you keep much of your property, including cars, work-related tools, and basic household furnishings.

 

If you file under Chapter 13, you pay what the courts determine you can afford over the 3- to 5-year period, and any amounts you still owe afterwards are discharged and you will no longer owe them.  Debts that usually have to be paid off during the plan are those secured by collateral or liens against property. You can catch up on debts like past-due mortgage payments by spreading them out over time.

 

Some types of debt are very difficult to have discharged in a bankruptcy. They have to be paid in full in a Chapter 13, and you will still owe any unpaid balance when the payment plan ends. You will also continue to owe them after your discharge under Chapter 7.

 

In Ohio, these debts include:

  1. Back child support, alimony and other family support
  2. Debts for personal injury or death caused by driving while intoxicated
  3. Student loans, unless repaying them would be an undue hardship
  4. Fines and penalties for violating the law
  5. Income tax debts within 3 years and all other tax debts
  6. Debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case

There are other debts that may be declared non-dischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them.  These include debts you incurred on the basis of fraud, embezzlement, larceny, malicious injury to another person or their property, and debts of $1,150 or more made within 60 days of filing.

Bankruptcy Protection

While you are catching up on your debts, Ohio bankruptcy law allows you protection from creditors.  There is an automatic-stay provision that prohibits most creditors from collection activity such as harassing phone calls, lawsuits, garnishments, repossessions, and foreclosures. If you are diligent about budgeting and paying off debts that cannot be discharged, bankruptcy protection can help you catch up on debts you do have to pay, even if they now seem insurmountable.

From the Author: How Can Bankruptcy Help?

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