Chapter 7 Bankruptcy

Can I File for Chapter 7 Bankruptcy if I am Unemployed?

Yes, you can file for bankruptcy if you are unemployed. As we’ll see later in this post, it can actually be easier to file bankruptcy if you have low income.

Many people are hesitant to file bankruptcy. Yet, the whole purpose of bankruptcy is to help people get back on their feet financially. Times may never be tougher than when you are unemployed, so why not file? This article explains when you qualify for Chapter 7 bankruptcy during unemployment, and will help guide you toward an understanding of what will get you back on track.

However, this bankruptcy discussion is in general terms, and every bankruptcy case is unique. Therefore, it is advised that you consult an experienced bankruptcy attorney before taking any action.

Chapter 7 Bankruptcy

First and foremost, what is Chapter 7 bankruptcy? In Chapter 7, the court takes inventory of your property to see if there is anything of sufficient value to sell. This means that a bankruptcy trustee will be appointed by the court to review your assets. This doesn’t happen literally, the trustee won’t come to your home and look under the bed. They review the list of property you file with the court to see if there is any non-exempt property. Before you get too worried, its important to point out that most people emerge from bankruptcy with all of their property intact, including their home and retirement. Once it has been determined that you don’t have anything to give to creditors, the bankruptcy court then forgives the rest of your debts, and you get a fresh start. Chapter 7 bankruptcy is the most common form of bankruptcy because it is the quickest bankruptcy process, often taking only a few months.

For more information on Ohio bankruptcy laws, click here.

How Do I Qualify for Chapter 7 Bankruptcy?

The simple fact that you are unemployed NOW actually means very little in determining whether you qualify for Chapter 7 bankruptcy. What really matters is your income over the last 6 months. Chapter 7 bankruptcy employs what is known as the “means test,” which uses your income to determine whether you qualify.

Chapter 7 Means Test

The Chapter 7 means test compares your household income to the median (not the average) household income in Ohio. If your income is at or below the median income for Ohio, then you qualify for Chapter 7 bankruptcy. Thus, being unemployed may actually help you to qualify because you will have no income.

The means test only comes into play if your income is above the Ohio median for a household of similar size. If your income is below Ohio’s median, you’re presumptively entitled to file for chapter 7.

Note, however, that the income calculation uses your income over the past six months. Therefore, if you just lost your job, even though you have no current income, your income for the past six months may be higher than the median income of your state. In that case, it may be a few months before you qualify for Chapter 7 bankruptcy.

If you earn more than the Ohio media for a household of similar size, the the means test comes into play. There are a few situations where you may be able to file Chapter 7 bankruptcy even though you earn above the median:

• Low Disposable Income: Disposable income is the money that you have left over after paying certain, “allowable” expenses (things like taxes and child support). If your income is low enough after allowable expenses have been subtracted, you may still qualify for Chapter 7 bankruptcy.

• Special Circumstances: If you present one or more “special circumstances” to a bankruptcy court, you may still qualify for Chapter 7 even though your income is too high. There are a variety of special circumstances. Some examples include: high medical expenses, military service, or unemployment. Thus, your recent job loss may present a special circumstance.

Several sources of income in addition to your job income are taken into account when assessing your qualifications using the means test. Income from spousal or child support payments that you are receiving, worker’s compensation, tips, received annuity payments, and several other forms of income are included in the calculation.

Moreover, there are some forms of income that are excluded from the means test calculation. Examples of these sources include social security retirement and disability benefits.

Please note that calculating your income, disposable income, or special circumstances using the means test can be very complicated. To properly assess your qualifications, you should speak with an attorney.

See also: Do I Qualify for Chapter 7 Bankruptcy in Ohio?

What if I Don’t Qualify for Bankruptcy Under the Means Test?

If you do not qualify for Chapter 7 bankruptcy, then you may still be eligible for Chapter 13 bankruptcy. In fact, in many cases where the court disqualifies a person under Chapter 7, they may simply convert the case into a Chapter 13. In Chapter 13 bankruptcy, you pay off your debts over an extended period of time according to a “repayment plan.” Thus, if you have too much income for Chapter 7, that income can be put to use in following a repayment plan.

See also: Personal liability for business debts

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What Does Ohio Law Say About Liability For Business Debt?

Whether or not you are personally liable for the debts of your business depends on two factors:

1. the structure of the business that you own and;

2. the contract you signed with your lender. As a practical matter, many lenders require the business owners to personally guarantee business debts regardless of entity choice.

Nevertheless, we will delve into the liability implications of various corporate forms below.

Your business may be structured as a Sole-Proprietorship, a Partnership (there are multiple forms of partnerships), a Limited Liability Company (LLC), or a Corporation. Each of these types of business entities, and the amount of personal liability associated with them, are explored below.

Am I Liable for the Business Debts of My Sole Proprietorship?

If you are the only owner of your business, and you have not organized your business as corporation a limited liability company, then you are likely a sole proprietor. The default setting for a sole proprietorship is full liability. If you take on debt as a sole proprietor, you owe it in your name. You’re fully responsible for paying it back, and in the event of default, your assets are potentially vulnerable. Therefore, if your business is in debt and owes money to creditors, those creditors may come after your personal property to satisfy the business debt.

See also: The Ohio Foreclosure Process Explained

Am I liable for the Debts of My Partnership?

For our purposes, it’s best to think of a partnership as a group of sole proprietors working together. Like a sole proprietorship, the default setting for a partnership is full liability, however, there are types of partnerships that offer limited liability. The different types of partnerships, and the liability associated with each is discussed below:

• General Partnership: A general partnership is the default form of partnership. If you and at least one other person agreed to own a business together, and didn’t form a business entity, then you formed a general partnership. In this type of business, each partner is considered a general partner, and each is liable for ALL of the debts of the business, not simply their fair share.

• Limited Partnership: A limited partnership consists of one general partner and one or more limited partners. Only the general partner is personally liable for the debts of the business. Limited partners are not liable for business debts. If your business was created with an agreement that one partner would absorb all liability for the business, then you probably have a limited partnership.

• Limited Liability Partnership (LLP): Depending on what state you live in, you may be allowed to organize your business as a limited liability partnership. In an LLP, all of the partners are protected from personal liability for the debts of the business. Thus, creditors may only take the assets of the business to satisfy a debt, and may not come after the personal assets of any of its owners.

Am I Liable for the Debts of a Corporation?

Technically speaking, Corporations are entities designed to limit the liability of their owners. A corporation is owned by its shareholders, who are protected from liability for the debts of the corporation. Hence, if a corporation is in debt, the creditors of that corporation may only come after the assets of the corporation, and the property of the shareholders cannot be touched. If you incorporated your business by filing as a corporation with the state, then your business is a corporation.

However, there are situations in which the creditors of a corporation may collect a business debt from shareholders. Examples of such situations include:

• Cosigning a Business Debt: If you cosign or personally guarantee a debt of the business, then you are equally liable to creditors. By cosigning or offering a personal guarantee, you have volunteered to be responsible for business debts.

• Piercing the Corporate Veil: Piercing the corporate veil is an expression used to describe when the creditors of a corporation may come after its owners (the shareholders) to pay its debts. The corporate veil may be pierced, and the shareholders may become liable for business debts under a number of circumstances, some of which include:

Failing to obey corporate formalities: Corporate formalities include things that are legally required of a corporation such as holding meetings of the board of directors, or holding annual elections for directors.
Commingling of Funds: If shareholders, as the owners of a corporation, have contributed much of their own funds, and also use the funds of the corporation as if they were their own, then a court may find that your funds are one in the same, and may hold you personally responsible for the debts of the corporation.

Fraud: If the corporation is found to have committed some sort of fraud by acting through its owners, then the shareholders may be held personally liable. An example of fraud may include, among other things, any falsification found on an application for a business loan.

Am I Liable for the Debts of a Limited Liability Company (LLC)?

Owners of an LLC are commonly called “members,” and only stand to lose the amount of money that they contributed to the business. Therefore, creditors of an LLC may only take the assets of the LLC entity to satisfy a debt, and they may not come after the members’ personal property.

However, just like with a corporation, creditors may come after members’ personal assets in a number of situations. Therefore, if you have personally guaranteed a business debt or cosigned on a business debt, then you are personally liable for that debt. Moreover, creditors may be able to “pierce the LLC Veil.” Thus, if there has been a failure to obey legal requirements, or any type of fraud, then you may have exposed yourself to personal liability.

It is important to understand that a person may never be 100% immune from liability for the obligations of their business. Therefore, you should consider speaking with an attorney if you have concerns that you may be liable for the debts of your business.

This post is intended as a basic overview of business liability issues, both in Ohio and nationwide. For more information on Ohio laws concerning LLC liability, take a look at this informative post by Worley Law.

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Bankruptcy can help eliminate Visa bills that have spiraled out of control

Yes, filing for bankruptcy is an effective way of eliminating credit card debt. If you’ve run large balances on a Visa card as a result of a job loss or unexpected medical procedure, filing for Chapter 7 will completely eliminate those bills. The bankruptcy discharge is powerful, it gets rid of most unsecured debts such as credit cards, personal loans and medical bills.

SEE ALSO: Debt Collector Harassment on Ohio, Know Your Rights

Looking for an added bonus? Unlike debts forgiven through the debt settlement process, debt discharged in bankruptcy is not counted as taxable income. You could discharge more than $100,000 of debt on your Visa card and your tax bill will not go up by a single penny. By contrast, when a credit card lender agrees to forgive $100,000 of debt, the IRS counts the amount forgiven as if you earned the money in your job and your tax bill goes up.

This means that settling your credit card debts has the potential to cause you to incur debts with the IRS.

Using credit cards to buy luxury items prior to filing for bankruptcy is strictly forbidden and can get you in trouble

It is important to keep in mind that there are rules to follow if you plan to shed your Visa bills in bankruptcy. A successful bankruptcy case requires good faith. You must approach the process honestly and fairly. Debtors who have recently racked up credit card bills buying flatscreen TVs, expensive clothing and jewelry are in for an unpleasant surprise when they meet the bankruptcy trustee. As a general rule, there is nothing wrong with having used your credit cards recently to purchase necessities like groceries or gas for your car, however, there is a presumption of abuse for purchases of $500 or more made within 90 days of filing for bankruptcy. Credit card purchases of $500 or more on luxury items within the 90 day window are presumed to be non-dischargeable in your bankruptcy case. This means that they cannot be eliminated.

An example of how bankruptcy discharges Visa bills

Let’s say that John and Mary are a married couple living in Dayton, Ohio. when the economy took a turn for the worse, John lost his job and the couple started paying their bills using a Visa card. It took more time than they expected for John to find another job and the credit card debt became unmanageable. John and Mary meet with a bankruptcy attorney and decide that Chapter 7 is their best option.

Once John and Mary have retained counsel, it will be his or her job to work with them to identify all of their outstanding debts, including their credit card debts. Once the debts have been identified, they are listed in the bankruptcy schedules. Schedule F lists the unsecured non-priority claims of the debtor in a bankruptcy case, and this is where John and Mary’s Visa debt will be included.

Once the case is filed, the bankruptcy court sends notice to all creditors listed in the schedules that a bankruptcy case has commenced and that they are prohibited from contacting John and Mary regarding their claims. Assuming that everything goes smoothly, John and Mary will receive a complete discharge of their Visa debt within approximately 90 days of filing their case. In the event that the couple purchased luxury items on credit of over $500 within 90 days of filing for bankruptcy, it is possible that the credit card company would file a lawsuit objecting to their discharge. If John Mary were found to have intentionally tried to game the system, their entire discharge could be threatened. The likelihood of a credit card company or trustee objecting to discharge is often tied to just how egregious the violation appears to be. The higher the dollar amount, and the greater likelihood of bad faith will both contribute to problems for the debtor.

The best policy is to enter the system honestly and openly.

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I see people every day.  People with pride, work-ethic, and humility.  Unfortunately, many of these people have fallen on hard times.  They are distressed and worried about providing for their families.  I met John and his wife Sandy early in 2011.  They developed careers working for the GM plant, Delphi, in Moraine, just south of Dayton.  John had been there 26 years; Sandy had been there for 23.  In fact, that is where they met and began their relationship.  When I met them, they had 3 children, the oldest of whom was about to graduate from high school.

John and Sandy took the responsible steps that make a strong financial situation for their family’s future.  They made extra mortgage payments and owned their home free and clear in 2005.  They made extra contributions to their employer-provided 401(k) accounts.  They did not finance things and had never used a credit card.

Then, economic crisis struck Dayton and the automotive industry at large in 2007 and 2008.  John and Sandy lost their jobs.  Even though John had put in enough time at Delphi to garner his full pension, Delphi did not have the money to honor his years of work.  They lost their health insurance.  John was able to find a job making one-third of his previous salary; Sandy was unable to find work.  Eventually her unemployment benefits ran out.  They survived by liquidating the dwindling 401(k) accounts, using credit cards, cash advances, food stamps, and taking a mortgage out on their home.  After some time, they were unable to keep up with the mortgage payments, the bank initiated a foreclosure, and creditors were trying to garnish 25% of John’s paycheck.

That’s when I met John and Sandy.  Proud, hard-working Ohioans that had been financially responsible most of their lives.  We talked for some time about what their goals were.  They really just wanted to be able to keep their family warm and fed.  Sandy had finally just landed a job making minimum wage.  So, we engaged in some credit counseling and negotiations with some of the creditors that were attempting to garnish John’s pay.  When the creditors wouldn’t budge, we resorted to exercising their federal bankruptcy rights.  We were able to eliminate the home debt and get them into a suitable rental.  We protected John’s paycheck from the lawsuits.  We even eliminated the tax debt that they had incurred when they liquidated the retirement accounts.  We gave them just enough breathing room to be able to manage their new budget.

Since that time, their story has improved.  John found a position as a shift manager at a machine shop, and Sandy has decided to stay at home and help raise their grandchildren.  They are trying to reestablish their retirement, but they still don’t finance anything or use credit cards.  They understand that their bad situation wasn’t a result of any bad decisions.  It was just a function of these hard times.  At their worst, they were still among the friendliest and most genuine people I’ve ever met.

Sometimes the line between feast and famine is thinner than we’re led to believe.

SEE ALSO: Ohio Homestead Exemption in Bankruptcy, What Property Can I Keep In Chapter 7?

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