5 Common Misconceptions About the Chapter 7 Bankruptcy Process

But won’t I lose my business or house? This is one of the most common bankruptcy questions we’re asked, and we’ve answered part of it in our mythbusting article about the chapter 13 bankruptcy process. Now we’re here to clear up misconceptions surrounding chapter 7 bankruptcies as well. Here at Hausen Law, our experienced chapter 7 bankruptcy lawyers have heard it all, and we’re ready to set the record straight.

Why The Truth About Bankruptcy Matters

So many individuals in Ohio suffer with heavy burdens of debt, feeling hopeless and unable to see a future in which they can be financially sound. Chapter 7 and chapter 13 bankruptcy are the legal means by which the federal government has provided relief for these folks, but all too often they aren’t taking advantage of available help because of misinformation. Knowing the facts is empowering on many levels, as it frees a debtor from fear of the future, while also giving them a light at the end of their financial tunnel. 

As is true with all misconceptions, these start with a kernel of truth. We’re going to get to the bottom of things and share what you need to know.

1. Losing Your House

This is probably the most common bankruptcy question we hear from potential clients: ”But won’t I lose my house?” So many people out there believe that every person who files for a chapter 7 bankruptcy will inevitably lose their home. Yes, this can happen, but that possibility doesn’t mean it will become a reality–every case is different.

Our state has what is known as the Ohio Homestead Exemption. This legal exemption allows someone filing for bankruptcy in Ohio to protect the equity in their home from being used to repay creditors and keeps them in their home. This exemption is updated every three years to reflect the changes in property values, inflation, and other factors at play. The most recent adjustment to the Ohio Homestead Exemption was in 2022, when the amount was increased to $161,375. This should remain the available exemption until March 31, 2025. For married couples filing jointly for bankruptcy in Ohio, the exemption is doubled, to total $322,750 in protected equity. Since that is above the price of an average home in Ohio, it’s likely that a couple filing together will not need to worry about losing their home. 

How does this exemption work? In a chapter 7 bankruptcy a debtor is required to turn over property and assets to the bankruptcy trustee. The trustee then sells them and divides the proceeds between creditors. But the Ohio Homestead Exemption covers the equity in your home, making it exempt from being included with other assets for liquidation. 

Equity is the difference between the value of your home and the total amount of your mortgage debt. So if you have paid off a large portion of your mortgage already, your equity will be high. On the other hand, if you’ve only recently acquired a home or have a lengthy repayment plan, your equity may be low. Either way, the generous exemption should be applied to your home’s equity and allow you to keep it. If the equity in your home is higher than the homestead exemption, it may be possible to add on a wildcard exemption as well to make the equity fully exempt. And if you are hoping to employ these exemptions when filing for bankruptcy in Ohio, it is also key that you are current on your mortgage payment. If you are behind on payments, then once the automatic stay is lifted, a creditor can still legally foreclose on your home. They may even petition the court to prematurely lift the automatic stay. So remaining current on payments is a must.

2. Post-Bankruptcy Home Loans

Built in to the structure of filing for bankruptcy in Ohio is admitting that you aren’t able to keep up with your bills. So, logically then, you’d probably assume that you won’t qualify to take on more debt after your bankruptcy case wraps up. Thankfully, that’s not true. Bankruptcy is a legal provision, a protection for consumers, and while it may look different, it is definitely possible to qualify for a home mortgage loan after bankruptcy.

Filing for bankruptcy will inevitably hurt your credit, and could see your score fall by hundreds of points. That’s why, following your bankruptcy, it is absolutely essential to start rebuilding credit right away. This will help you to be more likely to find a willing lender who will enable you to take out a mortgage loan. Using our credit repair program is a great way to start the path to achieving your goals. Writing a letter that explains any extenuating circumstances is another necessary step, as some lenders may require this information before they are willing to work with you. 

Once you have started the credit repair process and taken additional steps to rebuild your credit by learning new habits and using financial tools, you will likely have a few types of mortgage loan available to you: 

• FHA Loans: this mortgage loan is insured by the Federal Housing Administration and will be available to you two years after your chapter 7 bankruptcy discharge
• VA Loans: a home loan sponsored by the Department of Veteran Affairs with stipulations about length and type of service by the loan seeker, available two years following your chapter 7 bankruptcy discharge
• USDA Loans: a home mortgage loan from the United States Department of Agriculture (USDA) that applies to some properties in rural areas, available three years post chapter 7 bankruptcy discharge
• Conventional Loans: the standard form of a home mortgage loan will generally be your longest wait, at about four years post chapter 7  bankruptcy discharge

For those who are involved in the FHA’s Back to Work Program, they may be able to apply after just one year post chapter 7 bankruptcy discharge. And if an individual is able to prove that extenuating circumstances (e.g. extended illness, medical bills, divorce, job loss, business failure) are what led to the bankruptcy, they may be able to apply for various types of loans even sooner than what is outlined above. It is important to note that these various timelines begin once your bankruptcy case is closed, not when it is filed.

3. Elimination of Debt From Credit Reports

Some individuals who are considering chapter 7 bankruptcy may believe that once their bankruptcy is discharged, their debts will be wiped clean and no longer visible on credit reports going forward. This is not true right away. In general, most debt is removed from a credit report after seven years. However, debt that was part of a chapter 7 bankruptcy case will remain visible on your report for up to 10 years, at which point it will automatically drop off. That said, the debt should be noted as being “discharged” or “included in bankruptcy” and listed at a zero balance while it is still visible. It is important to stay on top of how debt is reported to the credit bureaus so that if anything is wrongly labeled you can have it corrected to accurately reflect the state of your debts. This will ensure that previous debts do not hold you back if you are looking to apply for a loan. You can request free, weekly credit reports online.

If you notice that a creditor repeatedly refuses to report your discharged debt properly, it’s wise to consult with an experienced Ohio bankruptcy lawyer, as the creditor may be in violation of the law.

4. Types of Debt That Can Be Cleared In Bankruptcy

Contrary to what you may believe, neither a chapter 7 nor a chapter 13 bankruptcy can clear all the debts that a person may have. Unsecured consumer debt, like a credit card balance, medical bills or unpaid utilities, is the primary type of debt that is discharged in a bankruptcy. Secured debt, like a vehicle or home, could be sold to pay creditors if available exemptions do not cover them. In certain types of bankruptcy, you can also decide to keep on paying a secured loan post-bankruptcy, such as in a case where you want to retain a vehicle.

Some debts, however, cannot be discharged in bankruptcy, while others are not likely to be wiped clean. Debt you will still be responsible for after bankruptcy include:

• Student loans
• Owed taxes
• Court-mandated payments (e.g. alimony and child support, personal injury, debts that are part of a divorce decree, restitution)
• Condo or homeowner association dues
• Debts incurred through fraud

While most of these debts will never be discharged in bankruptcy, it is possible that student debt can be eliminated if you can show that you have experienced an extreme change in your physical or financial health, to the point that repaying the debt would cause an undue hardship that would not allow you to maintain a minimal standard of living. This is a rare exception, and not one that anyone would want to qualify for. However if you feel that your circumstances may meet the criteria, you can reach out to a chapter 7 bankruptcy lawyer to learn more.

If you meet strict guidelines for tax debt, it is also possible that it can be discharged in a chapter 7 bankruptcy. Again, an experienced bankruptcy attorney can help you to sort out the details.

5. Cosigners and Bankruptcy

Some who have used a co-signer to enable them to take out a loan may think that when they file for bankruptcy, they alone are affected. Unfortunately, this is not the case. Even if personal debt could be discharged in a chapter 7 bankruptcy filing, it does not absolve co-signers from their legal responsibility to repay, and creditors could go after co-signers for repayment, even before the bankruptcy filer’s debts have been cleared, since the automatic stay does not extend to the co-signer. 

If the situation is reversed, and it is the co-signer or guarantor who is filing for bankruptcy, the outcome will depend on the type of debt and its terms. So long as you are current on payments, the co-signer’s bankruptcy should not affect you. However, if creditors stipulate that when a co-signer cannot repay debt, they no longer have assurance of repayment and so the debt is now due immediately, that could spell trouble for the primary borrower. If the debt was for property, the lender may be able to place a lien on it or attempt to repossess the property. Consult with an Ohio bankruptcy lawyer to learn exactly what would happen in your case.

Work With A Chapter 7 Bankruptcy Lawyer To Answer Your Bankruptcy Questions

There are many common misconceptions out there about filing for bankruptcy in Ohio. Not understanding the truth about chapter 7 or chapter 13 bankruptcy can lead you to avoid pursuing this legal means of protection and buckling under the heavy weight of pressing debt. There’s no need to go that route. Contact our Northeast Ohio Bankruptcy Attorneys with any bankruptcy questions you have to ensure that you chose the best financial path forward.

For help with all things bankruptcy in Ohio, our skilled and experienced bankruptcy attorneys are here. Hausen Law is happy to serve all of Northeast Ohio, including the Akron, Canton, Cleveland, Wooster, Dover/New Philadelphia, and Youngstown communities. Contact us today to set up a free consultation or to inquire about our credit counseling and credit repair programs.