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The following contains a lot of information and detail. When you are experiencing the stress and turmoil of debt and what to do about it, it might be best to arrange to discuss these details in a calm, non-threatening environment. The Law Office of Thomas F. Fezzey offers and strongly recommends a free, no obligation consultation at our office in Wheaton, DuPage County, Illinois, so that you can learn more about the various options that are available to you and how the law applies to your unique situation. Please go to the “Resources” page on this web site and download a copy of the “Bankruptcy List.” This is a complete list of information needed at a consultation so that the attorney can get a complete and accurate view of your financial situation, all of which is kept in the strictest of confidence. We typically allocate at least two hours for such a consultation.
If you have filed a Chapter Seven bankruptcy and are wondering what to expect when the time comes to meet with the Chapter Seven trustee, go to the “Resources” page on this web site and download a copy of the “Chapter 7 Section 341 Meeting Guide.”
Before there was freedom of speech, freedom of religion, the right against unreasonable search and seizure, the right against self-incrimination or the right to bear arms, our founding fathers sought to guarantee each and every United States citizen the right to file bankruptcy. In Article One, Section Eight of the United States Constitution, Congress was authorized to enact bankruptcy laws. Bankruptcy is a Constitutional right because those who drafted our Constitution believed that people should get a fresh start after experiencing financial distress. Imagine how different our lives might be if H.J. Heinz, Milton Hershey, Henry Ford or Walt Disney had not been given a fresh start after their bankruptcies!
If you are unable to pay all of your bills with your current income, especially bills such as credit cards, bankruptcy may offer the relief that you need. Sometimes divorce, medical bills, the failure of a small business, or any setback can throw good people with good intentions into bankruptcy. When bad things happen to good people, they need a fresh start.
No one should file bankruptcy without first engaging in an in-depth consultation with an experienced bankruptcy attorney. Only after a thorough examination of your particular situation can a recommendation be made about whether or not bankruptcy is the right thing for you and what type of bankruptcy might be appropriate.
For most individuals, there are two types of bankruptcy, Chapter Seven and Chapter Thirteen.
Chapter Seven is the liquidation chapter of the Bankruptcy Code. In theory, a trustee collects all of your property that is not exempt (See “Exemptions Under Illinois Law” below), sells it and uses the proceeds to partially pay your creditors. In general, however, most people for whom Chapter Seven is appropriate have only exempt property, which means that they often keep their property while having most of their debts forgiven or discharged.
Some debts, such as child support, alimony, court-ordered fines, debts obtained through fraud or deception, personal injury debts caused by driving while intoxicated, most taxes and most student loan debts may not be discharged in bankruptcy. Also, you may receive a Chapter Seven discharge only once every eight years.
Chapter Thirteen permits individuals to keep their property by repaying creditors out of their future income. Each Chapter Thirteen debtor, with their attorney, writes a repayment plan that must be approved by the court and then, the debtor pays the trustee the amounts set forth in their plan and the trustee distributes payments to the creditors. Chapter Thirteen is generally for an individual who has a lot of non-exempt property that would otherwise have to be sold in a Chapter Seven bankruptcy and has had a temporary problem repaying debts. There are some specific restrictions on Chapter Thirteen bankruptcies that make them appropriate only about 10 percent of the time.
Not necessarily. If the equity in your house does not exceed the exemption amount, you may keep your house in a Chapter Seven bankruptcy as long as you keep up the mortgage payments.
A Chapter Thirteen bankruptcy is often chosen largely because an individual debtor has a lot of equity in his or her home and they want to keep it. As long as the mortgage payments are made on time and the debtor can also make the payments to the trustee as agreed in the Chapter Thirteen plan, the debtor should have no problem holding on to a house. If a homeowner has fallen into arrears on mortgage payments, Chapter Thirteen is frequently used to halt or forestall foreclosure actions, but the obligation to make mortgage payments continues while the amount of the arrearage is put into the Chapter Thirteen plan for repayment over time.
Generally, any property that is not collateral or security for a loan cannot be repossessed. Property that is exempt under state law cannot be taken from you nor can you be forced to sell it to satisfy any creditors.
If property is used as collateral or security for a loan, such as an auto loan, and the loan is in default and not repaid, the property can be repossessed by the lender and then sold to repay the balance on the loan. If the lender sells the property for less than the balance on the loan, the difference between the balance on the loan and the price received for the property when sold is called a deficiency. That deficiency is dischargeable in a Chapter Seven bankruptcy.
The fact that you filed bankruptcy can appear on your credit report for as long as ten years. Filing a bankruptcy petition may affect your ability to obtain credit in the future. The way in which a potential lender interprets what they see on a credit report is entirely up to them. Certainly, credit is a privilege and not a right and some lenders will not look with favor on a loan applicant with a bankruptcy on their credit report. Other lenders might look at the fact that you have erased all or most of your debt, it will be 8 years before you can file for a Chapter Seven bankruptcy and if you have steady income, you could be seen as credit worthy. In most situations, a Chapter Seven bankruptcy will result in an improvement in your credit score, because of the elimination of outstanding debt.
Some lenders will look at a bankruptcy debtor as someone with no other debt, who cannot file another bankruptcy for another six years and perceive them as a relatively low risk. In fact, one of the greatest dangers for someone who has recently filed a bankruptcy is all of the credit card applications that they receive. At the interest rates many credit card companies charge, many
will gladly extend credit to a recent bankrupt debtor. The temptation to apply for such credit cards should be resisted to avoid getting in the same kind of trouble that necessitated a bankruptcy filing in the first place.
Though it will probably be tough to get a mortgage within the first year or two after a bankruptcy, if you can satisfy a mortgage lender that you can make mortgage payments, your chances of getting a mortgage after that first year or two could be quite good. Consult with a mortgage broker for more detailed information.
The general rule is that student loan debts and tax obligations are not dischargeable in bankruptcy. However, there are some exceptions to that rule.
Personal or individual tax obligations that are more than three years old may be dischargeable. If more than three years have elapsed since the filing of a particular personal tax return, the tax obligation that you showed on that return and older returns from previous years can be discharged in a Chapter Seven bankruptcy. Generally, in a Chapter Thirteen Bankruptcy, the tax obligations get repaid in whole or in part through the Chapter Thirteen plan.
If a student loan debt will impose an undue hardship on the debtor and the debtor’s dependents, a student loan debt may be dischargeable in a Chapter Seven bankruptcy.
You may voluntarily repay any debt. However, it is necessary to list all of your creditors on a bankruptcy petition for your own protection. If you choose to repay certain ones after the fact or if you choose to enter into a reaffirmation agreement with some of them, you may.
As soon as the Bankruptcy Petition is filed with the Clerk of the U.S. Bankruptcy Court and the creditors are notified, the creditors are legally prevented from pursuing any collection action of any kind. This is referred to as the "Automatic Stay." After the filing, if any creditors telephone you or attempt to collect from you, refer them to your attorney.
There are two parts to the cost to file bankruptcy, 1) The filing fee and 2) The attorney fee. The filing fee is currently $299.00 for a Chapter Seven Bankruptcy and $274.00 for a Chapter Thirteen Bankruptcy. Attorney's fees will naturally vary. Check with a lawyer referral service in the county in which you live and call several different attorneys to inquire about fees.
SECURED AND UNSECURED DEBT
Most people do not know the difference between secured debt and unsecured debt, but the law makes a huge distinction between them. Most of us get bills in the mail and just know that they have to be paid. We don’t separate them into secured debts and unsecured debts.
A secured debt is any debt for which there is collateral. Collateral is some specific thing that the lender can take from the borrower if the borrower does not make the payments. The most common examples of secured debts for consumers are most auto loans, mortgage loans and anything purchased with a credit card from a certain well known big box electronic store. If you don’t make your car payments, the car will be repossessed. If you default on your mortgage loan, the lender will foreclose and take the real estate away from you. The Big Box Electronic Store has the option of repossessing a television or computer that you purchased with their credit card if you default on the payments, because of some fine print in their credit card agreement that gives them what is called a “Purchase Money Security Interest” in whatever was purchased. Bankruptcy or no bankruptcy, secured lenders always have the right to take back their collateral if a borrower defaults and fails to make the payments.
Unsecured debt is debt for which there is no collateral. Some examples of unsecured debts would include most credit card debt, medical bills and debts owed to friends or relatives. Unsecured lenders can still take things from you if you do not make the agreed payments to them, but they have to go through a lot more steps before they can do so. What they usually do first is call you, repeatedly and harass you about making payments. If that doesn’t work, they turn things over to an outside collection agency that sends letters and may also make phone calls. Eventually, an unsecured lender may turn an account over to a collections attorney. Usually the attorney will send a few more threatening letters and ultimately will file a lawsuit. If and when they win such a lawsuit, the unsecured lender/creditor gets what is called a “judgment.” A judgment is a court order, signed by a judge, that says the defendant debtor owes the plaintiff creditor a certain amount of money and the plaintiff creditor now has the right to collect from the defendant debtor, using any legal means available to them. The most common methods of collection for creditors who have received a judgment include wage garnishment and seizure of bank accounts. It is important to note that there are certain things that unsecured judgment creditors can never take from you, legally, and those things are called “exemptions.” A complete list of all of the exemptions under Illinois law is below.
A secured debt is only secured up to the value of the collateral. So, if the value of the collateral for a secured loan is less than the balance owing on the loan, the remainder of that balance is unsecured. Many times, what may appear to be a secured debt is partially secured and partially unsecured. For example, if an auto loan has a balance of $10,000.00, but the value of the automobile securing the loan is only $6,000.00, then only $6,000.00 of that loan is secured and the remaining balance of $4,000.00 is unsecured. If that car gets repossessed, the lender would sell it at an auction, apply whatever they sell it for to the outstanding balance on the loan and then seek to recover the remaining balance on the loan, called a “deficiency,” from the borrower just like any other unsecured creditor.
CHAPTER SEVEN BANKRUPTCY
In a Chapter Seven bankruptcy, the debtor receives a “discharge” of their unsecured debt, with some exceptions, such as student loans, most tax debt, child support, alimony and other debts for fines. “Discharge” means that any obligation to repay the debt is terminated. The debtor may repay a debt after it is discharged if they choose to, but they do not have to and the creditors are permanently prevented from trying to collect such debts. A discharge is very different from having a debt forgiven. Forgiven debt is usually treated as taxable income, whereas debts that are discharged in a bankruptcy are not income and are not taxable. When a debt is “settled” with a creditor for something less than the full balance owed, the creditor will usually send a 1099 to the debtor for the portion of the debt that was forgiven.
What the unsecured creditors are supposed to receive in a Chapter Seven is the proceeds from the sale of any NON exempt assets or property that the debtor may have. In other words, if a debtor has anything that does not fit into one of the Exemptions Under Illinois Law (below) that would be turned over to a trustee who would sell the assets and distribute the proceeds to the unsecured creditors so that they receive something. As a practical matter, it is rare for a Chapter Seven debtor to have any non-exempt assets and thus rare for a Chapter Seven client to lose any property.
CHAPTER THIRTEEN BANKRUPTCY
A Chapter Thirteen bankruptcy is, in many ways, like a debt consolidation plan. In a Chapter Thirteen bankruptcy, the debtor pays all of his or her disposable income to a Chapter Thirteen trustee who then distributes that money to the creditors. Disposable income is your monthly income less your monthly living expenses. To qualify for a Chapter 13, you must have regular income and your monthly living expenses cannot exceed your monthly income. You may not have secured debt in excess of $1,081,400.00 or unsecured debt in excess of $360,475 in a Chapter 13. The unsecured creditors must receive at least as much as they would have if a Chapter Seven was filed and non-exempt property was sold and liquidated.
The reasons that a debtor might find a Chapter 13 appropriate might be if they had a lot of assets that were not exempt and they do not want to surrender any of those assets or that their income was excessive in relation to their monthly living expenses. If a debtor has a lot of disposable income, in many situations, they would be required to repay at least a portion of their unsecured debt. Even if a debtor has no unsecured debt, a Chapter 13 can be helpful to get caught up with a mortgage loan if the debtor has fallen behind in their monthly mortgage payments. Chapter 13 is often used to stop a mortgage foreclosure while the debtor repays the arrearage through the Chapter 13 repayment plan.
EXEMPTIONS UNDER ILLINOIS LAW
(Property that cannot be taken from you, legally, by an unsecured judgment creditor or a Chapter Seven Bankruptcy Trustee)
1. $15,000.00 of any individual’s interest in their residence ($30,000.00 for married couples). Proceeds from the sale of your residence are exempt for one year after receiving such proceeds; same dollar limits.
2. All of your necessary wearing apparel, school books, family pictures and Bible without a dollar limit. This applies equally to your dependents.
3. Your interest in any property not to exceed $4000.00 in value (the “Wild Card” exemption). For married couples, husband and wife each get an exemption of up to $4000.00. Property is generally valued at the current market value, or what you would actually get for it if you sold it used, right now, at a garage or yard sale or alternatively at 10% of the original purchase price.
4. Up to $2400.00 of your interest in any one motor vehicle. Husband and wife each get an exemption of up to $2400.00 in a motor vehicle for married couples. If a married couple owns only one motor vehicle, their $2400.00 exemptions may be combined for a $4800.00 exemption in the one motor vehicle Your interest is your equity in the vehicle, or the difference between the current market value of the vehicle and the balance on the auto loan.
5. Up to $1500.00 in value of your interest in any implements, professional books, or tools of your trade. Husband and wife each get this exemption as with other exemptions with dollar limits. These are valued at their current market value; what you would get for them if you sold them, for example, at a garage or yard sale or at 10% of the original purchase price.
6. Any professionally prescribed health aids for you or any of your dependents.
7. Proceeds of a life insurance policy and the cash value of any life insurance policies.
8.Social Security benefits, unemployment compensation, or public assistance benefits.
9.Veteran’s, disability, illness or unemployment benefits and Worker’s Compensation Benefits.
10. Alimony, support, or separate maintenance, to the extent reasonably necessary for your support and your dependent’s support.
11. An award under a crime victim’s reparation law, a payment on account of the wrongful death of someone whom you were dependent on and a payment under a life insurance contract that insured the life of someone whom you were dependent on.
12. A payment up to $15,000.00 on account of personal bodily injury to you or someone whom you depend on for support.
13. Retirement Plans. An interest in the assets held in or the right to receive pensions, annuities, benefits, distributions, refunds of contributions or other payments under a retirement plan. Retirement plans include: stock bonus, pension, profit sharing, annuity, or similar plan or arrangement, including a retirement plan for self-employed individuals or a simplified employee pension plan; a government or church retirement plan or contract; an individual retirement annuity or individual retirement account; and a public employee pension plan created under the Illinois Pension Code.
14. Any real property held in tenancy by the entirety in which you are one of the tenants. Applicable only if just one of the tenants by the entirety is filing a bankruptcy. If both husband and wife are filing a joint bankruptcy petition or if there is a judgment against both husband and wife, then the $15,000.00 / $30,000.00 exemption in your residence applies.
15. 85% of your gross weekly wages or 45 times the current Federal Minimum Hourly Wage, whichever is greater, for any work week is exempt from collection.
16. Any property belonging to a partnership in which you are a partner.