Most people's small businesses are too small to be worth anything to creditors, so those people don't have to worry about having their business seized and sold in a personal Chapter 7 bankruptcy.  However, people with valuable businesses that own land, paid-off vehicles, large bank accounts, accounts receivable and other assets need to be very careful when filing Chapter 7 bankruptcy because creditors may be able to seize the business and liquidate it to pay themselves.

Even a simple case involving a very small business requires substantial planning to avoid creditor action.  At court, the bankruptcy trustee will absolutely demand that you turn over any excessive funds in your business bank accounts despite the fact that you may not think of those as your property.  Vehicles and tools may also be seized in some cases.  Chances are your business needs to keep these things in order to continue functioning, but that is not the bankruptcy trustee's problem.  His job is to collect as much as he can for creditors, regardless of whether it destroys your business.

There are ways to minimize or sometimes eliminate any vulnerability your business has in a Chapter 7 bankruptcy.  It can be as simple as waiting to file your bankruptcy on a day that your business bank account balance is very low.  This kind of garden-variety pre-bankruptcy planning is considered legitimate, at least when there are small amounts of money involved.  Transferring away large assets such as real estate and vehicles prior to bankruptcy is viewed with suspicion and in some circumstances can lead to your bankruptcy being permanently denied.

Chapter 7 bankruptcy is a 120-day process that eliminates most debts, and is the type of bankruptcy that makes the most sense for most people.  But how do you know whether Chapter 7 bankruptcy is even an option?

The short answer is to call me or another experienced Cleveland-area bankruptcy attorney, who should be able to answer your Chapter 7 questions quickly and accurately after a few quick questions.  That being said, here are the most common things that prevent people from being able to file a Chapter 7:

1.  You make too much money to file a Chapter 7 bankruptcy

Chapter 7 is intended to help low-income people, not people who have gotten into debt despite high incomes.  The income cutoff is determined by the average income for your state, a figure that is recalculated from time to time.  Keep in mind that just because you exceed the Chapter 7 bankruptcy income cutoff, that does not necessarily mean that you cannot file a Chapter 7 bankruptcy.  It just means that your case becomes more complicated and the court will need to look at your expenses and other financial information to determine whether you qualify. 

As of 12/31/2012, the cutoffs for Ohio are as follows:

1 person household cutoff = $41,946
2 person household cutoff = $52,139
3 person household cutoff = $59,724
4 person household cutoff = $72,764

The cutoff goes up an additional $7,500 thereafter for each additional member of the household.

If your income exceeds these levels, you still might be able to file a Chapter 7 bankruptcy, but it is more difficult.  You will need to show that certain expenses, such as your mortgage, car payment, certain child care expenses, etc., are higher than average and leave you so little money left over at the end of the month that you are unable to repay your debts, even partially.  You are not allowed to count all types of expenses in this analysis and the calculations are very technical.  For more information about these income and expense calculations, see my blog post "What is the means test?"

2.  You have filed bankruptcy in the last 8 years

You are only permitted to file Chapter 7 bankruptcy once every 8 years.  If you get into debt problems during the 8-year period you either have to file a Chapter 13 bankruptcy, if you qualify for it, or find some kind of non-bankruptcy solution.

3.  You have valuable property that will be seized if you file a Chapter 7 bankruptcy

A lot of my clients technically qualify for Chapter 7 bankruptcy but decide not to file because it would cause the court to seize some of their property.  The rules about what kinds of property can be seized are complex but summarize them here:  The most common types of property seized by the court include houses, cars and portions of tax refunds for the following year.  In addition, it is fairly common for whole life insurance policies, stocks and bonds, certificates of deposit, upcoming sales commissions, proceeds from divorce or personal injury lawsuits, and other types of assets to be seized by the court.  After the court seizes the assets they are sold and paid out to creditors according to very specific rules.

Losing property as part of a Chapter 7 bankruptcy isn't always the end of the world.  I have had dozens of clients decide that they don't care about their house or their car anymore as long as they can can eliminate their debts.  I have also had clients work with the court to negotiate payment arrangements that allow them to keep property in a Chapter 7 bankruptcy that would otherwise be seized.  The important thing to know is that I analyze all of my clients cases ahead of time and let them know what to expect when they go into court.  If they are not comfortable with that, then we find another solutions besides Chapter 7 bankruptcy.

Most of the time there is no danger of losing your house in bankruptcy.  Ohio law allows each person filing bankruptcy to keep up to $21,625 in home equity, which is defined as the value of your home minus what you owe on it.  For instance, if you own a home that is worth $100,000 and you owe $80,000 on it, then you have $20,000 in home equity.  This is not a problem in bankruptcy because it is well under the $21,625 limit.  If a husband and wife file bankruptcy together and both of their names are on the house then the news is even better:  The $21,625 limit can be doubled to $43,250.

The unfortunate truth is that most people filing bankruptcy are well under this $21,625 number due to depressed home values and/or multiple refinancings of their home.  Many people filing bankruptcy have refinanced their homes over and over in order to lower their monthly payments, which prevents them from accumulating any home equity.  I have had clients who have been in their houses for 40 years or more yet have no home equity because of reasons like these.

When should you worry about losing your house in bankruptcy?  Pretty much only when you put a very large payment on the house or have been paying on it for a long time.  Furthermore, if you've got a good bankruptcy attorney then what happens in court shouldn't be a surprise:  I analyze all of my clients' assets carefully to make sure they aren't going to lose anything.  If I think there is a potential issue I warn you of it, tell you what I think will happen, and have you sign a disclaimer that shows you understand the risks involved.  Sometimes in borderline cases it is necessary to hire an appraiser ahead of time to find out just how much your house is worth so we don't have to worry about any dispute over its true value.

In the rare case when your house is an issue, you have a couple options.  You can let the house go, attempt to negotiate a payment plan with the bankruptcy trustee (easier said than done), or give up on filing bankruptcy.  You also might be able to do a Chapter 13 bankruptcy, a 3-to-5-year payment plan that lets you keep all your property and results in a full elimination of most debts.  However, many people who might like to do a Chapter 13 bankruptcy are unable to afford the monthly payments or do not qualify for other reasons.  Your attorney should work closely with you to ensure you know all your options and find the one best for you.

Probably the most common question people ask me about bankruptcy is, will I lose my car?  The answer is, with the help of an experienced attorney, almost certainly not.  However, here are five situations where you will lose your car, or may lose it if your case isn't handled properly.

1.  You have too much automobile equity

If you have a paid off car or put a large down payment on a car you're still paying on, you may have too much automobile equity to keep your car in bankruptcy.  Automobile equity is defined as the value of your vehicle minus what you owe on it.  For instance, if you have a car with a blue book value of $10,000 and you still owe $7,000 on it, you have $3,000 in automobile equity.

Ohio law allows each person filing bankruptcy to keep up to $3,450 in automobile equity in one vehicle and one vehicle only.  In addition, in some cases the number can be increased to about $4,600 total.  If a husband and wife file together, it is sometimes possible to double these numbers, but if you have a paid off car worth $10,000 there is no way to keep that car in a Chapter 7 bankruptcy.  The bankruptcy trustee will seize your vehicle and sell it for the benefit of your creditors.

It is sometimes possible to engage in something called "pre-bankruptcy planning" in order to allow you to get some of the benefit of your vehicle and still file bankruptcy.  However, pre-bankruptcy planning is very, very delicate and requires a great deal of attention from an attorney to do right.  Attempting to do your own pre-bankruptcy planning often results in triggering action against you to block your bankruptcy and/or seize property you transferred out of your name prior to filing.

2.  You have an auto finance company that refuses to work with you in bankruptcy and you don't qualify for a reaffirmation agreement

Most car finance companies allow you to do something called "retain and pay," which is where you continue paying your car, the payments are applied to your balance, and when the balance is paid off you  get the title.  The creditor likes this arrangement because they still get paid and you like this arrangement because you get to keep your car.

However, at my office I have a list of auto financing companies that refuse to do retain and pay.  These are companies that want a reputation for being tough in bankruptcy court and use that reputation to get you to sign something called a reaffirmation agreement.  A reaffirmation agreement is a new contract that undoes the bankruptcy with respect to the vehicle and allows the financing company to go after you for money if you stop paying on the car.  The court is suspicious of reaffirmation agreements because they often result in people getting garnished after the bankruptcy if they were unable to pay on their car and it got repossessed.  Because you can only file Chapter 7 bankruptcy once every 8 years, this can leave debtors in a very difficult position.

If you're filing bankruptcy and have one of these "tough" car financing companies, we will work with you to try to get a reaffirmation agreement signed so you can keep your car.  However, judges will not approve reaffirmation agreements in a lot of cases because the monthly payment is too high and you cannot actually afford the payment without skipping other kinds of payments like rent and utilities.  If this is the situation, your only two options are going to be to give up the car or give up on filing bankruptcy.

3.  You fail to claim the right exemptions in your bankruptcy paperwork

Ohio Revised Code section 2329.66 lists "exemptions" or rules that allow debtors to keep certain kinds and amounts of property in a Chapter 7 bankruptcy.  As mentioned in #2 above, depending on your case, you can exempt up to $4,600 in automobile equity by listing the proper exemptions in Schedule C of your bankruptcy petition.  However, if you fail to list the proper exemptions then the bankruptcy trustee is going to seize your vehicle and sell it at auction.  Remember, the bankruptcy is not your friend.  He or she is a bill collector who gets paid a commission for anything they take from you, so when you go into bankruptcy court with bankruptcy papers that aren't filled out right they are going to enrich themselves by impoverishing you.

4.  You purchased your car in the 90 day period prior to filing bankrutpcy and your auto finance company failed to file the appropriate paperwork in time

When you purchase a car on credit the financing company has to file paperwork with the state of Ohio to record their lien, which is what gives them the right to repossess your car if you don't pay.  If the car was purchased within 90 days of the date you filed bankruptcy then the lien needs to have been recorded within 30 days of when you purchased the car.  If it was recorded even one day late the bankruptcy trustee will "strip the lien" off the car, meaning you now have a paid off car.  If that sounds like good news to you, it isn't, because there is something you're not considering:  You're usually not allowed to keep a paid-off car in bankruptcy (see #1, above).  The bankruptcy trustee is going to seize your car, sell it at auction,