Bankruptcy is a legal process designed to help individuals and corporations liquidate or restructure their debts. Most consumers will file either a Chapter 7 or Chapter 13 bankruptcy. The other types are generally for corporations, farms, and even governmental entities.
Whether and when you file depends on your individual financial situation. There is no one-size-fits-all plan or solution. It is important to consider several things before making your decision. How much debt do you have? Do you have any assets that you want to protect? Sometimes, filing at a specific time can prevent a wage garnishment or other collection attempts. It is important to discuss these issues with a competent attorney before filing.
A Chapter 7 bankruptcy is designed to eliminate most debts, while selling assets to compensate creditors. Most Chapter 7 bankruptcies are “no asset” filings. These generally apply to people who don’t own stocks, bonds, and other easily sold assets. There are also exemptions that apply to your assets. For example, in Illinois, you can exempt $15,000 of your home’s value. A couple filing jointly can exempt $30,000. Retirement accounts like 401(k) plans are totally exempt.
To qualify for a Chapter 7 bankruptcy, you must pass what is called the “means test.” It was added to the Chapter 7 process in 2005. The test first compares your income to the income of the average household in your zip code. If you are under that number, then you are eligible to file a Chapter 7. Even if you fail the first step of the test, it is possible to show that after your expenses, you do not have enough remaining income to pay your bills. If you cannot pass that part of the test, you must file a Chapter 13 bankruptcy.
A Chapter 13 bankruptcy reorganizes your debts, paying them off over the course of time. Some Chapter 13 cases can last 3 to 5 years. In order to qualify, you can have no more than $394,725 in unsecured debt like credit cards and personal loans. You can have no more than $1,184,200 in secured debt like mortgages and car loans. These amounts adjust to reflect changes in the consumer price index.
The Chapter 13 plan dictates how you will repay creditors over the course of your case. The plan calculates how much each creditor will receive. It can also include other terms that are binding once the court approves the plan. In some cases, the trustee may object to a plan until it is changed in certain ways. Once the plan is approved, if you make all of your plan payments, then your debts will be discharged at the end of your case.
If you cannot pass the means test you must file a Chapter 13. If you have significant assets that you want to protect, it is likely best to file a Chapter 13. In some cases, you can avoid foreclosure in a Chapter 13 plan. However, those plans can be difficult to manage. They will involve paying the past-due amount on your mortgage over time while also paying the regular monthly payment to your mortgage company. That is in addition to your plan payments. Since it can be difficult to predict income over time, it may be necessary to modify your plan at a later date. A competent bankruptcy attorney can help you craft a Chapter 13 plan that best suits your needs.
The trustee is employed by the court to oversee the bankruptcy case. In a Chapter 7, the trustee verifies the specifics of the petition and looks for any assets that can be sold to pay creditors. In a Chapter 13, the trustee plays a central role in the approval of your plan and receives your monthly plan payments.
A bankruptcy will show up on your credit report. However, most people already have highly damaged credit when they file. The months of missed payments, possible judgments, and the like do more damage to your overall credit than the bankruptcy filing itself. What’s more, after your discharge you will likely start receiving credit card offers. The lenders know that you’re unable to file and discharge your debts again for seven years.
The automatic stay is designed to protect you from your creditors. While it is in place, they cannot attempt to collect debts from you, contact you, or take legal action against you. Some creditors, like mortgage lenders, can request relief from the automatic stay if your bankruptcy does not adequately protect their interests. This usually happens in Chapter 7 filings where a mortgage foreclosure has been filed or is about to be filed. Getting relief from the stay allows the bank to proceed with the foreclosure case.
Notify your attorney immediately. Depending on the facts, you may have a few causes of action against the creditor, including filing an independent lawsuit in federal court.
The meeting of the creditors, or 341 meeting, allows the trustee to verify the correctness of your bankruptcy petition, identify assets that may be available for liquidation, and other things. It also affords your creditors an opportunity to appear. In your normal consumer bankruptcy, a creditor attending the 341 meeting is extremely rare.
Yes. There are two financial management courses that you must complete. One takes place pre-filing. The other must be done to receive your discharge.
The way the bankruptcy code is structured, your attorney must receive payment before filing. If you owe your attorney at the time of filing, your attorney becomes a creditor. This creates a conflict of interest between you and your attorney. It also means the attorney cannot recover the outstanding amount due.
In Chapter 13 cases, your attorney can build their fees into your plan. Part of your monthly plan payment goes to your lawyer. Some attorneys guide their clients into Chapter 13 filings to allow them to pay their legal fees over time. In general, it is not advisable to file a Chapter 13 unless you do not qualify for a Chapter 7. It is difficult to predict your income over the course of 3 to 5 years. The Chapter 7 provides immediate relief that doesn’t require you to predict your income for the near future.
Yes. One big blunder is when an unsuspecting consumer does their holiday shopping with credit cards. Filing in the New Year for a fresh start can result in creditors objecting to you discharging some of your debts. You shouldn’t run up significant debt just before you file.
Also, you should not pay some creditors and not others. This is particularly important if you owe money to a family, friend, or employer. Payments that seem to have preferentially treated specific creditors can be clawed back by the trustee.
If discovered, you will be prosecuted for bankruptcy fraud. It is a federal crime. You can go to prison for committing bankruptcy fraud. Simply do not do it.
Not really. It is incredibly difficult to discharge student loan debt. The law in this area is changing, but it is still safe to say that the vast majority of student loan debt cannot be discharged. Without legislation from Congress, there’s not much that can change that.
Yes. You cannot discharge tax debt until you have owed it for three years (from the date you filed your return). You cannot discharge child support obligations or spousal support obligations. You cannot discharge criminal financial penalties. Your attorney can advise you whether specific debts can be discharged.
It is important that you feel comfortable with your lawyer. You want someone who can give you specialized service rather than treat you like a number. You also want an attorney with experience in other areas of consumer protection law—that lawyer can likely provide more comprehensive advice.
Please contact us for a paid consultation to determine if bankruptcy is right for you.
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