In this article, we give an overview of what bankruptcy can do for you and what it can’t and how the automatic stay affects creditors ability to collect on certain types of debt.
If you’re facing mounting debt and mounting uncertainty, bankruptcy provides a powerful tool to reset your financial situation and get creditors off your back. It suspends creditors from continuing to collect via telephone harassment, wage garnishment, lawsuits, collection letters, etc. Depending on the type of bankruptcy it can also wipe out many types of debt, including medical bills, credit card payments, personal loans, and more. But bankruptcy is not a catch-all, certain types of debt such as student loans, tax payments, child support, and sometimes mortgage payments will not go away, or must be recouped by other means.
What bankruptcy means for you depends on what type of debt you’re struggling with, how much you have and what you're willing to lose. You’ll have to determine what type of bankruptcy is best for your situation—this is a good conversation to have with a bankruptcy attorney—with the two main options being Chapter 7 and Chapter 13. Once you file for bankruptcy the automatic stay kicks in and most creditors will be prohibited from continuing to harass you for payment. We’ll discuss the automatic stay in more depth in another article.
Filing for bankruptcy will put a hold on foreclosures, evictions, and repossessions through the automatic stay. If you’re in the middle of eviction litigation the process will be suspended after filing for bankruptcy. In many bankruptcy cases, this freeze will be temporary and once the stay lifts the foreclosure, eviction, or repossession process will proceed. If filing for Chapter 7 bankruptcy you’ll still lose your house if you can’t make up the debt through the bankruptcy process. Chapter 13 will still activate the automatic stay but unlike Chapter 7, it is designed to enable you to keep assets such as your house and your car.
For most people, bankruptcy is the means by which they get rid of unsecured credit card debt, medical bills, personal loans, mounting utility bills and just about any other owed debt not tied to a property. Secured credit debt is a different story. If you bought jewelry, furniture, large electronics, etc, and financed the item through the store it is likely secured credit and you’ll have to pay for the item, sell it, or it’ll be repossessed. In general, secured debt can be wiped out in bankruptcy, but you won’t be able to keep whatever item is securing the debt, whether it is a house, car, or something else. The specifics of this will depend on the type of bankruptcy you file.
There are pros and cons to each type of bankruptcy, with Chapter 7 bankruptcy primary reserved for low-income applicants. Unlike Chapter 13, Chapter 7 does not allow you to keep your property if you’ve fallen behind on payments. Chapter 13 also has many advantages if you have enough income to put together a reasonable payment plan for creditors. Below are a few things that Chapter 13 can do for filers.
Eliminate child support and alimony obligations. These debts won’t be erased in Chapter 7 bankruptcy, so you’ll need a plan to continue to pay these. In Chapter 13 bankruptcy they will be part of your 3-5 year repayment plan and you’ll need to continue to pay them as originally ordered by the court.
Erase student loans. Unfortunately, student loans are still not forgiven through bankruptcy unless undue hardship can be proven. Proving undue hardship is very difficult as it requires you to be unable to pay your student low now and very unlikely to be able to pay in the future and any attempt at paying would infringe on your ability to do other things like pay for housing or food.
Stop a secured creditor from foreclosing or repossessing certain property (keep your house or car). It’s important to understand the difference between a lien and regular debt. A lien is a court ruling that gives the creditor the right to sell the property at auction and apply the proceeds to a loan. In Illinois, a lien stays on a house for up to 7 years, or until the debt gets paid, even if the creditor makes no attempt to force the sale of the house. Bankruptcy can still remove your requirement to pay the loan, but it will not remove the lien on the property. Sometimes a deal can be worked out where a portion of the loan is wiped out, or payments lowered, and the property owner continues to pay some amount after that (This is common in chapter 13), but the creditor may feel that it is unlikely he or she will make the money back and invoke the right under the lien to force the sale of the property. None of this can happen until the automatic stay is lifted.
Eliminate tax debt. Usually, you can’t get tax debt eliminated in bankruptcy, but your attorney can discuss other methods to reduce debt owed to the IRS.
If you’re considering bankruptcy but you’re not sure if it’s the right move for your situation, don’t hesitate to give us a call at 630-324-6666.
O'Flaherty Law is happy to meet with you by phone or at our office locations in: