Consumer Bankruptcy

bankruptcyIntroduction

This Primer will help you decide if Bankruptcy is right for you. Please read it and call for a free consultation.

How Much is the Filing Fee?

Court Fees in the Northern District of Illinois can be reviewed here.

What Assets Can I Keep in a Bankruptcy?

The Illinois Compiled Statutes provide a list of the property that can be retained by a debtor (i.e. exempted) despite creditor action. The same list applies to Bankruptcy cases filed in Illinois. The Illinois Exemptions broken down by property type and value can be found here.

Types of Bankruptcy Relief

While the primary types of Bankruptcy relief sought by individuals are

  • Chapter7 Liquidation, and
  • Chapter 13 Reorganization

They may also use Chapter 11 Reorganization if their debt exceeds the limits set forth in the Bankruptcy Code.

bankruptcy reliefWill I Lose My Home or Car?

The answer depends on many factors, beginning with what type of Bankruptcy relief is being sought:

Liquidation: Both secured and unsecured debts are discharged, including mortgage debt. In that case the mortgagee bank will claim its collateral (i.e. the home) by foreclosing.

Reorganization: Debtors are entitled to retain all property – including items secured by a note or mortgage – as long as they agree to repay what they are behind in the reorganization and continue making the scheduled payments.

Note: Many times even homeowners who seek to liquidate their debts in Chapter 7 still do not lose their home. The factors considered in connection with this determination include

  • Whether debtors have another house
  • The FMV of the debtors’ existing home
  • Amount due under debtors’ mortgage
  • Whether debtors have school-age kids
Must My Spouse File Bankruptcy As Well?

No, but you may discover that your spouse also owes many of your debts and that it would be beneficial for your spouse also to file a bankruptcy.

debt dischargeCan I Discharge Student Loans in Bankruptcy?

Federally guaranteed student loans are not dischargeable in Bankruptcy except in cases of “undue hardship.”

But remember that the Federal Government is explicitly prohibited from discriminating against a borrower based on a prior Bankruptcy – so it should be possible to file Bankruptcy and seek additional student loans.

How Do Chapter 7 or 13 Affect Future Credit?

Different people have different experiences obtaining credit after they file a bankruptcy case. Some find it more difficult. Others find it easier because they have relieved themselves of their prior debts or because their creditors know they cannot file another bankruptcy case for a period of time. Some people may discover that obtaining future credit is easier if they file a Chapter 13 and repay some of their debts than if they file a Chapter 7 and make no effort to repay. The bankruptcy laws prohibit your employer from discharging or discriminating against you solely because you have filed a bankruptcy case.

Handling Pre-Filing Collection Attempts

Both Federal and State laws govern collections, so attempts to collect must comply with the Automatic Stay I Bankruptcy (the “Stay”), the Federal Fair Debt Collection Practices Act (the "FDCPA"), and Illinois consumer-protection laws such as the Consumer Fraud Act.

Handling Post-Filing Collection Attempts

The filing of a Bankruptcy case causes a universal self-executing injunction to spring into effect. This injunction, known as the Automatic Stay, makes it an act of contempt of Court, punishable by severe penalties, for any creditor listed in the Bankruptcy case to take such actions as

  • Contacting the Debtor in any way;
  • Taking action to collect judgment;
  • Acting to enforce lien on property;
  • Evicting or foreclosing on Debtor;
  • Executing on the Debtor’s assets; or
  • Harassing Debtor, orally or in writing
chapter 7 liquidationChapter 7 Liquidation

The purpose of a Chapter 7 is to discharge (wipe out) most debts and allow the debtor a fresh start. A person can file a Chapter 7 only once in 8 years. The fact that you filed a bankruptcy can stay on your credit history for up to 10 years.

There are two kinds of creditors in a bankruptcy:

  • Secured;
  • Unsecured; and
  • Priority Unsecured.

A secured creditor can execute on collateral held by the Debtor. Examples of common secured debts are those relating to cars, furniture, major appliances, jewelry, and of course mortgages.

An unsecured creditor is not entitled to the return of specific property, even if the Debtor fails to repay the creditor. Common unsecured debts include credit cards, medical bills, utility bills, and most store charge cards.

An unsecured priority creditor is the holder of a liability determined to be “special” such as maintenance, child support, most taxes, and federally guaranteed student loans. Priority debts cannot be discharged in Bankruptcy.

In Chapter 7, Exemptions become very important. and the most common of these are

  • Up to $15,000 per debtor in the equity in owner-occupied real property
  • Up to $2,400 per debtor in the equity in a motor vehicle
  • Necessary wearing apparel
  • Up to $4,000 of personal property per
  • debtor
  • Up to $15,000 in personal injury damages per debtor

If a debtor has assets (owns anything) above the exemptions allowed, those assets may be taken, sold, and the money used to pay back the creditors.

What Happens When I File Chapter 7?

You turn over all of your non-exempt property to a person known as a "trustee in bankruptcy" who sells it and distributes the proceeds to your creditors under certain priorities prescribed in the bankruptcy laws. In exchange, unless you have committed certain wrongful or fraudulent acts before or during the bankruptcy or there are other unusual circumstances, you will receive a discharge (or cancellation) of all of your "dischargeable" debts.

What Property May I Keep In Chapter 7?

As previously mentioned, the Debtor may retain certain items known as Exemptions. Exemptions are available to each individual in a Bankruptcy, so if both you and your spouse file a bankruptcy case each of you would be entitled to Exemptions.

Debts Not Discharged In Chapter 7?

A discharge in Chapter 7 will not affect debts such as alimony, child support, certain taxes, fines, debts arising from educational loans, and debts you fail to disclose to the Court. At the request of a creditor, the Bankruptcy Judge may also exclude loans you received by giving a lender false financial information, as well as debts arising from fraud, embezzlement, drunk driving, larceny or certain other willful or malicious acts.

debt reliefChapter 13 Reorganization

Chapter 13, also known as a Wage Earner's Plan, is heard by the same judges in the same Courtrooms. The Court fees for filing a Chapter 13 are the same as for filing a Chapter 7. There are several differences between a Chapter 13 and a Chapter 7. The most important are:

In a Chapter 13 the debtor attempts to repay his creditors rather than wipe out their claims with no

payment. Generally a secured creditor is entitled to payments totaling 100% of the present value of the secured property. Unsecured creditors may receive 100% of payment, or less, depending upon the debtor's income.

Unlike the exemptions allowed to the debt in a Chapter 7, there are no limits as to what a debtor can keep in a Chapter 13. However, a creditor cannot receive less in a Chapter 13 than he would have received from the sale of the non-exempt assets in a Chapter 7.

In a Chapter 13, the debtor must propose a payment plan to the Court. Payments under this plan are made to the Trustee (who charges 10% of all funds collected as his/her fee). The trustee gives the money to the various creditors. In order to present a plan, the debtor must first show the Court that he/she is able to meet his/her monthly living expenses. These expenses include rent, food, clothing, utilities, transportation costs, etc. out of his/her regular monthly income. It does not matter what the source of the income is, as long as it is stable and regular. The debtor must then still have sufficient funds left over to make payments on his/her proposed plan to off his/her debts.

Almost all debts can be included in a Chapter 13, even those that cannot be discharged in a Chapter 7. However, many of these debts will have to be paid off at 100% of the amount owed. A Chapter 13 plan can be extended for up to 60 months (5 years). A debtor can go into a Chapter 13 as often as necessary. There is no 6-year limitation as in a Chapter 7.

What Happens When I File Chapter 13?

Normally, in Chapter 13, you keep all or most of your property and propose a plan to repay all or some of your debts over time. During the period the "plan" is in effect, which can be as long as five years, you make regular payments (typically once a month) to a Chapter 13 Trustee, who, in turn, distributes the money to your creditors. Under certain circumstances, the Court may approve a Plan permitting you to keep all of your property even though you repay less than the full amount of your debts. Certain debts not dischargeable in Chapter 7 such as those based on fraud may be discharged if you successfully complete your Chapter 13 plan. In order to be eligible to file a Chapter 13 case you must have regular income and owe less than certain limits in terms of secured and unsecured debt.

Is Bankruptcy Right For You?

Ask Yourself These Questions:

  • Are you making minimum payments on your credit cards? Do you have Payday loans?
  • Have you suffered a loss that affected your finances such as divorce, accident or lay off?
  • Are you behind on mortgage or auto payments? Are you in foreclosure or repossession?
  • Has a judgment, citation to discover assets, wage garnishment order been issued to you?
  • Are you living on the bubble, with no savings or retirement funds?
  • Are you just 1 or 2 paychecks away from falling behind on the bills?
  • Do you receive telephone calls and dunning letters from creditors?
  • Does stress about debt cause you to lose sleep or affect your mood?
  • Could you use a financial fresh start?

If you answered yes to any of these questions, contact our office for a no-cost telephone consultation.

Still Have Questions?
Contact Us for a Consultation

M. Hedayat & Associates, PC