Question: What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Answer: Generally, bankruptcy has two purposes: (1) to protect your assets and income from creditors; and (2) to give you a "fresh" financial start.

Chapter 7 bankruptcy is known as a "straight" bankruptcy, or "liquidation," wherein a court-appointed trustee examines the debtor’s assets to determine if anything is available to be sold or recovered for the benefit of creditors.

Chapter 13 bankruptcy is a "reorganization," wherein one’s debts are "adjusted." Under Chapter 13, a debtor makes some payments on his or her debts over a period of three to five years using future income in a plan approved by the bankruptcy court. To file a bankruptcy case under Chapter 13, you must have disposable income which can be used to pay down your debts.

Q: Will I have to sell my house or car if I file for bankruptcy?

A: In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt.

If you are behind on a car loan or home mortgage payments, and you want to keep your car or home, a Chapter 7 case probably will not be the right choice for you. This is because Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt. However, a Chapter 13 bankruptcy case may be a good option for saving secured property, such as a home, as you can use a Chapter 13 plan to catch up on back payments and get current on the loan.

Q: How much damage does filing for bankruptcy do to my credit?

A: If you are behind on your bills, your credit may already be damaged.

Bankruptcy will probably not make things much worse. The fact that you’ve filed a bankruptcy case can appear on your credit record for 10 years from the date your case was filed. But because a bankruptcy discharge wipes out your old debts, you are likely to be in a better position to pay your current bills, and you may be able to get new credit.

Q: How soon after filing do I get court protection from creditors?

A: With a few important exceptions, bankruptcy immediately stops all of your creditors from taking actions to collect on your debts through an "automatic stay" that goes into effect immediately upon the filing of your case. Exceptions to the automatic stay include criminal proceedings and certain family law proceedings (such as for child custody and visitation rights).

Q: Does the Legal Aid Society of Hawaii help people who are considering filing for bankruptcy relief?

A: Thanks to a grant from the Community Stabilization Initiative Fund of the Hawaii Community Foundation, Legal Aid conducts a monthly pro se clinic, designed to teach eligible participants how to file their own Chapter 7 bankruptcy petition. I teach this do-it-yourself clinic in two class sessions, about one to two weeks apart, in Legal Aid’s Honolulu office. Our staff assists with completing forms, but each participant would represent him or herself ("pro se") in the bankruptcy filing. There is no charge for these services, but participants are responsible for the bankruptcy court filing fee ($299), or applying for a waiver of the fee. (I instruct qualifying participants how to apply for this waiver.) I also offer full representation services for Chapter 7 bankruptcy, depending on the client and the case. Legal Aid does not currently offer assistance with Chapter 13 bankruptcies.

Q: Why doesn’t LASH offer Chapter 13 assistance?

A: The Legal Aid Society of Hawaii has limited resources and unfortunately, our firm cannot offer representation in every case in which it may be desired, such as in a Chapter 13 bankruptcy case which can involve more complex asset and debt issues and creditor considerations.

Q: How does someone qualify for bankruptcy assistance from LASH — is there an income ceiling?

A: Generally an applicant with an income of up to 200 percent of the federal poverty income guidelines may be considered for bankruptcy services at Legal Aid.

Q: The U.S. Bankruptcy Court is located in Honolulu, but are bankruptcy services available from LASH on all islands?

A: Due to budgetary restrictions, Legal Aid currently only offers bankruptcy services to Oahu residents.

Interviewed by Erika Engle

"Akamai Money" seeks out local experts to answer questions about business in Hawaii. If you have an issue you would like us to tackle, please email it to business@staradvertiser.com and put "Akamai Money" in the subject line.