There is no magic formula for deciding when bankruptcy is the right choice. It is an option you might consider if you:
- Are paying only minimum amounts on your bills
- Can't budget yourself out of debt within five years
- Are getting notices that your mortgage or loans are being foreclosed
- Have had a severe financial setback, such as losing your job or a major client, a divorce or a costly illness
Bankruptcy does not get rid of all debts. You are still responsible for:
- Alimony
- Child support
- Most recent back taxes
- Most student loans
- Recent large purchases of more than $550 for luxury goods bought within 90 days of filing
- Fines or penalties of government agencies
- Fraudulent debts
- Cash advances of $825 within 70 days of filing
As a consumer, you can file for bankruptcy in Illinois under either:
- Chapter 7 (Straight Bankruptcy) to wipe out all debts except those listed and get an immediate fresh start or
- Chapter 13 (Wage Earner Bankruptcy) to set up a repayment plan to pay back your debts over several years' time.
Bankruptcy Abuse Prevention and Consumer Protection Act
On April 20, 2005, the President signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which limits individual access to US bankruptcy courts. Some of the changes, which were effective October 17, 2005, included:
- New bans on Chapter 7
- Increased Chapter 13 payments
- New presumptions against debtors with increased penalties
- The reduction of judicial discretion to balance competing interests
Under the new law, you are required to meet with an approved credit counselor in your judicial district in the six months preceding your filing for bankruptcy.
An additional new federal bankruptcy requirement is that you must file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7, otherwise known as "liquidation," is generally the simplest and quickest form of bankruptcy and is available to individuals, married couples, corporations and partnerships. A trustee (appointed by the court) gathers and sells your non-exempt property and uses the proceeds from the sale to pay your creditors.
Most chapter 7 cases are "no-asset' case, which simply means that you do not have any non-exempt property for the trustee to sell.
Federal bankruptcy laws provide for a "means test" which will determine whether you are eligible to file of Chapter 7 bankruptcy. If your income is below the median income for families in Illinois, based on Census Bureau statistics, you will be eligible. If you make more than the median income for families in Illinois, your income over the past six months is considered, along with mortgage and car payments, back taxes and child support due, and school expenses up to $1,650 per year. You won't be eligible for a Chapter 7 bankruptcy if, after deducting these amounts, and the living expenses provided in the Internal Revenue Service's national collection standards, you can still pay at least $6,000 ($100/month) to unsecured creditors over five years. If you don't qualify for a Chapter 7 bankruptcy, your only option would be a Chapter 13 bankruptcy.
The U.S. Trustee Program will apply the median family income data to all cases filed on or after March 15, 2009. This median family income data will be adjusted again after the Census Bureau updates the data.
For Illinois, for cases filed after March 15, 2009, the median income for a single wage earner is $47,355; for a family of two, it is $60,049; for three, $68,730; and for four, $81,184. Add $6,900 for each individual in excess of 4.
Also beginning October 17, 2005, you must obtain approved credit counseling before you can file bankruptcy.
Another new federal bankruptcy requirement is that you must file any overdue tax returns within weeks of filing a Chapter 7 bankruptcy.
Filing Chapter 7
A bankruptcy starts with the filing in bankruptcy court of the official petition and a lengthy document called a "Statement of Financial Affairs." This statement contains extensive schedules requiring a detailed list of all your debts, including:
- All priority debts (including taxes)
- All "secured" debts (including home mortgages and auto loans) that have property as "collateral"
- All unsecured debts of any kind
Other information that must be provided on the Statement of Financial Affairs includes:
- The names and addresses of the creditors
- A list of all assets, including real estate and all forms of personal property
It is extremely important that the "statement of financial affairs" be completed accurately. Debts that are not listed in the statement will not be discharged at the completion of the bankruptcy proceeding. Failing to list assets in an attempt to hide them from creditors may result in serious consequences, including the denial of discharge or charges of bankruptcy fraud.
Creditors are immediately prevented from trying to collect on your debts through what is called an "automatic stay." The stay is designed to preserve your property and to give you a break from litigation.
Anyone you owe - or anyone who wants to continue collection proceedings during the bankruptcy process - must show the bankruptcy judge, after a hearing, that there is "cause" to be allowed to continue with collection action (for instance, by showing that the property might deteriorate in value during the bankruptcy process).
The trustee takes control of any property you do not get to keep. From the sale of your property, the trustee pays the expenses of the administration of the case, and then gives any remaining money to creditors with allowed claims, according to the priority of the claims (with claims that are "secured" by property being paid first). Any wages you earn after you file the case are yours, beyond the reach of creditors who had claims on the date you filed for bankruptcy.
341 Hearing
After the bankruptcy is filed, you must appear at the "first meeting of creditors" (also called a "341" meeting ). The trustee can ask you questions under oath about your property and debts. Creditors can also question you on those subjects, but seldom do.
Generally, the only responsibility you have after the 341 meeting is to cooperate with the trustee in providing any requested information.
Creditors have 60 days after the 341 meeting to convince the bankruptcy court you shouldn't be allowed to jettison your debts.
The trustee may review your income and expenses to see if you have enough money left after your current living expenditures to pay something to creditors.
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What Can I Keep?
If there is no equity in your house (today's value less costs of sale less payoff balances on all liens and mortgages), the trustee in a Chapter 7 bankruptcy will abandon the house to you. That is, you keep it, as long as you keep the mortgages current.
A bankruptcy doesn't wipe out voluntary liens, like mortgages and deeds of trust, or tax liens. So the lender still has the right to foreclose if you don't pay. If you pay, everyone is happy. Remember, the lender doesn't want the property; it wants you to pay regularly on the loan. Foreclosure is a last resort for the lender if it concludes it can't get the owed money any other way.
If there's less than $15,000 in equity in your house, you can claim a "homestead exemption" and keep the house, as long as you pay the mortgages. If there's more than $15,00 in equity, it's possible you could lose the home. In that case, you may wish to consider a Chapter 13 bankruptcy. The proceeds from the sale of property are exempt 1 year from the sale.
If there is no equity in your car, after subtracting any car loan and exemption from the car's present value, the bankruptcy trustee will not take the car.
If there's more than $2,400 equity in your car, you may be able to pay the difference between the value of the car and $2,400 equity allowed to the Chapter 7 trustee and keep the car.
If you still owe money on the car, you can choose to reaffirm the debt to the secured lender. Under the new law, you have to reaffirm your car loan within 45 days after the "341 meeting." You no longer have the option of continuing your car payments without reaffirming the loan. Once the loan is reaffirmed, if you default on your payments and the car is repossessed, you are liable for the repossession deficiency.
You also have the option to redeem the car within 45 days of the "341 meeting" by buying it from the secured creditor in a single payment for its present value.
Under Illinois bankruptcy laws, you can keep:
- Unemployment, disability, workers' compensation, veterans' and Social Security benefits
- Retirement plan and life insurance proceeds
- Clothing and school books
- Professional books and tools of the trade up to $1,500 in value
- Family photos and bible
- Health aids
- Personal injury recoveries up to $15,000
- Wrongful death recoveries needed for support
- $4000 of any personal property
- Tools of the trade up to $1,500
- Alimony and child support as needed
- Property of business partnership
Chapter 13 Bankruptcy
If you're an individual or a sole proprietor, you can file a Chapter 13 bankruptcy to pay off all or part of your debts over three to five years. Rather than wiping out debts immediately, this option allows you to reorganize them so you have time to pay.
Many people who file Chapter 13 bankruptcies have:
- Mortgages or other loans they would like to bring current, so they don't lose their homes or other property
- Taxes, child support or student loans that can't be wiped out by Chapter 7 bankruptcy
- Moral convictions that all debts should be paid no matter how long it takes
For a Chapter 13 bankruptcy, you'll need a stable income with disposable income (income left over after you pay the bare necessities of life such as shelter, food and utilities).
The court will apply living standards set by IRS regulations to determine what is reasonable for you to pay for living expenses, including housing and food, to find out how much you have available to pay your debts.
The filing of the Chapter 13 petition must be accompanied by a proposed payment plan extending over three to five years. The proposed payment plan must provide for the payment of all "priority claims", such as taxes, in full. All tax returns for the four years prior to filing must be filed.
The bankruptcy trustee appointed by the Bankruptcy Court must review the proposed plan for accuracy and feasibility. The proposed plan is distributed to creditors, who have the right to object to the plan if it's unreasonable. If the plan is approved, you can keep all your assets during the period of the plan. You make monthly payments to the bankruptcy trustee, who distributes the funds to the creditors according to the plan. If the plan is completed as approved, your unpaid debts are "discharged." If you don't complete the repayment plan as approved, you'll have several other alternatives which an Illinois bankruptcy lawyer can explain to you.
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