The following are answers to questions, as well as topics, asked by clients about bankruptcy. If, after reading the answers and topics, you still have questions or would like to retain the office, you are invited to make an appointment.
Can I file bankruptcy only on the debts that I wish to discharge?
No! You must list all of your debts. There are no exceptions.
Can I exclude some of my property from the bankruptcy?
No! In your bankruptcy application, you must schedule all property (real or personal) that you own. Real property is real estate, for example, your residence. Personal property is everything that is not real property, for example, your automobile, your bank accounts, your furniture, etc. Personal property also includes property that is intangible; intangible property includes a right to receive property or benefit in the future. There are no exceptions. This does not mean that you will lose all your property. You will retain all of your exempt property as described herein.
What is the difference between a Chapter 7 and a Chapter 13 Bankruptcy?
A Chapter 7 bankruptcy is known as a "regular," or a "clean start," or a "straight," or a "liquidation" bankruptcy. It is what most people have in mind when they think of a bankruptcy. It allows you to discharge most of your debts, while keeping your exempt property. No monthly payments are required.
A Chapter 13 bankruptcy is known as a wage earner's plan. It is an alternative to a Chapter 7 bankruptcy. Chapter 13 involves making payments on your debts over 36 or 60 months; in return, you are allowed to keep most, if not all, of your property. At the conclusion of the payments, your unsecured debts are discharged; your secured debts, if still unpaid are not discharged. You must have regular income to file a Chapter 13 bankruptcy.
How do I determine whether to file Chapter 7 or Chapter 13?
Although there are many considerations as to whether to file under one or the other chapters, your eligibility to file a Chapter 7 bankruptcy is controlled by a median income test, also known as a "means (income) test," and a totality of the circumstances test. Generally, if your household income falls below the median income for the county in which you live, you may file a Chapter 7 bankruptcy. Even if it does not you may still qualify but only after analysis of your household income and living expenses. Unfortunately the criteria mandated by the new bankruptcy law is so involved that any further discussion of the test is not possible here. Normally you should file a Chapter 7 bankruptcy unless you have a lot of valuable unsecured or non-mortgaged property that you wish to keep. A Chapter 13 bankruptcy is especially helpful if you have more than $15,000.00 ($30,000.00 for a joint bankruptcy petition with your spouse) in equity in your home and you wish to keep it.
What is a "Debt?"
A debt is any present or future obligation to pay money or provide a service to a creditor. All debts to any creditor should be scheduled in your bankruptcy regardless if they are disputed or contingent. You want to discharge all possible debts. A creditor can be any person, partnership, corporation, limited liability company, or other entity, as well as any federal, state or local government. A creditor includes any relative or friend to whom you owe money or have a legal duty or obligation to do something, such as hold them harmless from a debt, provide a service, or deliver property to that person or relative. A binding promise or guarantee is also a debt and must be listed. Obligations and duties that are due and owing pursuant to orders of a divorce court wherein you have been directed to assume, pay or hold harmless a non-filing spouse or ex-spouse from a debt or an obligation is considered a debt to the creditor as well as your spouse or ex-spouse. A claim for personal injury, property damage, workers' compensation claim against you or any other claim anyone might bring against you should be listed.
Allegations of fraud.
A debt incurred as result of fraud (theft, forgery, misrepresentation, etc.) may not be dischargeable; under certain circumstances it may even be grounds to deny a discharge of all your debts by the bankruptcy court. Fraudulent misrepresentations (lies) or failures to disclose known information in your bankruptcy proceeding, either in your petition, schedules, statement of financial affairs, etc., are crimes. False statements (regardless if made under oath) to the court, trustee, or U. S. Trustee's representatives at any time are crimes. The FBI investigates bankruptcy crimes. You may go to jail or prison. Your discharge maybe denied.
What is "Property?"
"Property" is any real estate or personal property owned by you. Although not normally considered as property, the following is property for bankruptcy purposes:
- Any cash, checking accounts, savings accounts, certificates of deposit, or money market accounts.
- Life insurance with cash values.
- IRA, 401K, retirement or pension benefits.
- Stocks, bonds or securities.
- Money owed to you by any person, partnership, corporation or company.
- Expectations to receive money from any source in the future, including the right to inherit, claims in litigation or expected to be litigated; personal injury claims; workers' compensation claims; breach of contract claims; or tax refunds.
- Equipment, inventory and accounts receivable of an existing or closed business.
- Farm inventory, farm equipment, crops or livestock.
- Mobile homes, boats, motors, trailers, motorcycles, or ATV's.
- Collectibles such as guns, coins, stamps, antiques, books, etc.
- Jewelry, furs, audio or video equipment, photography equipment, musical instruments.
- Intangible property including the right to receive a benefit, money, personal property (example: a motor vehicle) or land in the future for whatever reason. This does not include gifts that have not been delivered, inheritance expectations or life insurance benefits if the person has not died.
- Anything else of value.
ARE INC0ME TAX REFUNDS CONSIDERED PROPERTY? MUST I LIST BOTH STATE AND FEDERAL REFUNDS AS PROPERTY? WILL I LOOSE MY TAX REFUND?
Yes, Yes, and Maybe.
The right to receive a refund in the future, even if the amount of the refund is unknown, is considered by the bankruptcy laws a property right. It must be listed as an asset if the amount is known. Even if it is not known, the trustee overseeing your bankruptcy case may require you to provide future tax returns and may very well require the refund be paid over to the bankruptcy court if it is not exempt. Do not spend a refund unless you have permission to do so. Often the refund check must be held until the court determines if it has an interest in your refund. The money paid into the court is used to pay administrative expenses and the balance is applied towards your debts.
Tax refunds that have been received and still exist in the form of cash should be listed as cash on hand or, if deposited in an account, as money in an account at a financial institution. Only if these assets are exempt will you be able to keep the money.
Do not apply for a rapid refund or a loan that is to be paid out of the refund.
What is the "Value" of property?
Personal property that secures a debt (mortgaged or collateralized property) is valued at what a retail merchant would charge for property of that kind considering the age and condition of the property at the time the value is determined.
Otherwise, property (real or personal) is valued at what price a willing seller would sell and a willing buyer would pay. A good value test is what it would sell for at public auction.
The value of personal property is not necessarily what it costs you new or what it would cost to replace new. Only if the merchandise has recently been purchased, i.e., within days, would its new cost or replacement cost be considered. But, even then, one should bear in mind that all retail personal property decreases in value as soon as you leave the store with it.
Real estate value is determined by purchase price, cost of improvements, comparable sales, recent appraisals, and/or county real estate assessments. One or more of these can be used as a basis for the value of your real estate.
What is "Equity?"
In order to understand how bankruptcy works, you must know the definition of "equity." Equity is the value of property, less what is owed against it, and any costs of sale. As an example, if your residence had a value of $57,000.00, but was subject to a mortgage of $42,000.00, you would have equity of $15,000.00 in the residence. If you had a car with a value of $10,000.00 but owed $7,000.00 against it, you would have equity of $3,000.00. If there are any costs of sale, those costs would further reduce your equity in your residence, car, or other property.
What is "exempt" property?
Exempt property is either personal or real property, which you are allowed to keep in spite of your debts and the failure to pay your debts. Bankruptcy personal property exemptions in Illinois are determined by Illinois state law, in particular, by Section 12-1001 (735 ILCS 5/12-1001). Exempt property includes the following:
- Necessary wearing apparel.
- Personal property of any kind, which in the aggregate does not exceed $4,000.00 for each debtor;
- Tools of trade for a debtor, not to exceed $1,500.00 in equity;
- One motor vehicle, not to exceed $2,400.00 in equity;
- All qualified retirement or pension benefits; including 401(k), 403(b), IRA, and SEP retirement savings plans.
- Residence attached to real estate if the equity does not exceed $15,000.00 ($30,000.00 for joint husband and wife debtors);
- Social Security, unemployment, welfare, VA benefits, disability benefits, worker's compensation benefits.
There are other exemptions, but this document does not allow for a complete discussion of the same. By listing all of your personal property and real estate, I will be able to identify any other exemptions you may be entitled to use to protect your property.
Exemptions can be waived by mortgage or security agreements.
What happens to my non-exempt property?
In a Chapter 7 bankruptcy any property you own, which is not "exempt", will be sold or applied to satisfy your debts to your general unsecured creditors. In a Chapter 13 bankruptcy you will be allowed to keep the non-exempt property so long as you make the payments to fund the Chapter 13 payment plan.
How I spent my Federal and State Income Tax Refunds--is that important?
Debtors often use their refund to pay debts to friends or relatives; some make gifts to friends or relatives. If such payment was made within the last year before filing, it may be considered a preference of one creditor over another; it may also be considered a fraudulent act to defeat the rights of your creditors. The bankruptcy law does not allow you to prefer one creditor over another or give your property away to avoid paying your debts.
The court has the authority to set aside payments to a creditor, even if it was a family member or a friend. A loan from a family member or friend is a debt. Payment of this debt can be considered a preference of one creditor over another.
You cannot avoid the burden of the bankruptcy law by making a gift. Disposal of property by gift may be considered a fraudulent act and can be set aside by the bankruptcy court.
What happens to my primary residence if my equity exceeds $15,000.00?
In a Chapter 7 bankruptcy, if you have real estate that is your primary residence, and the equity in that real estate exceeds $15,000.00, you may lose your primary residence. In a Chapter 13 bankruptcy you will retain your residence so long as you make all payments of a Chapter 13 plan.
Debts incurred shortly before filing bankruptcy.
Any debt incurred after you have decided to file bankruptcy is considered a fraudulent act and is grounds for denial of discharge of the debt and denial of your general discharge of all debts. Once you decide to file bankruptcy, do not incur any more debts except for routine monthly living expenses that you expect to pay out of ordinary income. A creditor may contest a discharge because you incurred a debt before you decided to file bankruptcy. The creditor may believe you incurred the debt with plans to file bankruptcy even though you intended at the time to pay the debt. It is impossible for this office to predict which, if any, creditor will assert such an objection. If such an objection is made, it must be litigated in the bankruptcy court and we charge extra for this service. An objection is formally made when an adversary proceeding is filed with the bankruptcy court.
Cash advances on credit cards.
Cash advances on credit cards may not be dischargeable. Do not obtain cash advances of any type or kind once you decide to file bankruptcy. If you do so, such advances could be considered a fraudulent act, which could result in you being denied a discharge or possibly being charged with a crime. Make sure you discuss any cash advances on credit cards with your lawyer during your initial consultation.
Balance transfers on credit cards.
Balance transfers on credit cards may not be dischargeable. Do not make balance transfers of any type or kind once you decide to file bankruptcy. To do so might be grounds for denial of a discharge or could be considered a crime. Make sure you discuss any balance transfers on any credit cards with your lawyer.
Transfers of personal property, cash or real estate after a bankruptcy is filed.
Once your bankruptcy is filed, all personal property, or real estate owned by you comes under the exclusive control of the bankruptcy court. You no longer have the right to transfer, sell or mortgage your real estate or personal property. You should continue to pay routine monthly living expenses out of ordinary income. Any significant payment of a debt besides routine monthly expenses or monthly installments should not be made without permission of your attorney. This restriction on the sale, transfer or mortgage of your property terminates once you receive the order of discharge or your bankruptcy case is dismissed.
Property settlement obligations from divorce or domestic relations case.
In a Chapter 7 bankruptcy, obligations created in a divorce may not be dischargeable. In a Chapter 13 bankruptcy, you can discharge financial obligations that are not considered child support or spousal support.
Gifts or transfers for less than full value.
If you have transferred property to anyone for less than its fair market value, the bankruptcy court may set the transfer aside and order the person who received the property to turn it over to the bankruptcy court. The person who received the property may become involved in your bankruptcy proceeding. These types of transfers are considered fraudulent and in violation of your creditor's rights. Your creditors must be treated equally even in anticipation of filing bankruptcy. The court will scrutinize any transfers made within two (2) years of filing or any gifts made within one (1) year of filing. You are required to disclose all transfers of real or personal property made to anyone within the last year in your bankruptcy papers. You cannot transfer real property or personal property to someone to avoid the consequences of bankruptcy.
Life Insurance Proceeds.
If, within six months after your petition for relief under Chapter 7 of the bankruptcy laws is filed, you become entitled to receive life insurance proceeds as a result of the death of anyone, you must report the same to the bankruptcy court. The bankruptcy court will then order that the money be transferred to the court and be applied to your debts. Failure to inform the court may be considered grounds for denial of discharge of all your debts and also could be considered a criminal act. Upon learning that you are entitled to receive proceeds from a life insurance policy, either before we file your bankruptcy petition, or within six months thereafter, you should immediately inform your attorney of this occurrence.
If you become entitled to an inheritance anytime within 6 months of filing your petition for bankruptcy under Chapter 7, you must inform the bankruptcy court of the same. Any inheritance you become entitled to will become an asset of your bankruptcy estate and, in all likelihood, would have to be turned over to the court to be applied towards your debts. You should inform your attorney if you become entitled to any inheritance during that six month period. Failure to do so could be grounds for denial of your discharge and also could be considered a criminal act.
If you have filed a timely, non-fraudulent income tax return and did not engage in tax evasion, but have simply failed to pay the tax, the obligation is dischargeable in Chapter 7 or Chapter 13 so long as:
- Taxes are more than three (3) years old; and
- Taxes were assessed more than 240 days before the bankruptcy.
When counting off the three years, count three years after any extension period expired. Besides extensions, certain events can also interrupt the three year period, including the following:
- The time that an automatic stay existed in an earlier bankruptcy case.
- Any amount of time during which a taxpayer assistance order is in effect.
- Any time that the IRS was prevented from collecting the taxes because of requests for due process hearing.
It is not possible for me to give an opinion on whether or not you qualify for discharge of your taxes until you have consulted with an accountant, who determines your qualifications based on the above criteria. If you are seeking a discharge of taxes, you should consult with an accountant familiar with the exact history of your tax return and contacts with the Internal Revenue Service. Your accountant should provide me a detailed history of that contact. Then, and only then, can I give an opinion as to whether or not your taxes are dischargeable.
Normally, student loans are not dischargeable except in cases of extreme hardship. Extreme hardship can only be shown after trial and presentation of supporting evidence. The cost of litigation can be costly.
Child support and ex-spouse maintenance.
Child support and ex-spouse maintenance is not dischargeable.
Sale of secured property.
It is illegal to sell or transfer any property you have pledged as collateral without permission of the creditor. Any debt secured by such property that has been sold or transferred, may not be dischargeable.
Clients may not know if their property purchased on credit has been pledged as collateral. That status is only determined by the written contract you signed with your creditor.
Retaining collateralized property in a Chapter 7 bankruptcy.
You may retain real property or personal property that has been mortgaged so long as you agree with your creditor that the debt will survive the bankruptcy and you will continue to make payments. Both you and the creditor must execute a Reaffirmation Agreement and that Agreement must be filed with the bankruptcy court. The Reaffirmation Agreement creates a new debt that survives the bankruptcy and the obligation as described therein is not discharged by the bankruptcy proceeding. Reaffirmation Agreements that are filed with the bankruptcy court can be rescinded if notice of rescission is given to the court and to the creditor within sixty (60) days of filing the Agreement with the court.
Under the new bankruptcy law, there is a test to determine whether or not you can reaffirm a debt. If you fail this test, you can only reaffirm if your attorney or the bankruptcy judge certifies that you are able to make payments on the debt and it is not otherwise a hardship upon you or your family. Without such certification, the reaffirmation may not be approved by the court. Your attorney may refuse to certify the reaffirmation. The reason he will not certify is because it is not in your best interest. This office will not certify any reaffirmation agreements wherein it will be a hardship upon the client or debtor.
Your creditor is not required to execute a Reaffirmation Agreement, but usually will do so because it is in the creditor's best interest to avoid the cost and expense of repossession of the collateral. Creditors will be reluctant to enter into Reaffirmation Agreements if you are behind in your payments. If you intend to reaffirm a debt, then keep your payments current on that debt.
Within thirty (30) days of the meeting of creditors, a Chapter 7 debtor must perform the stated intention with respect to collateral of a secured or mortgaged debt, i.e., surrender, redemption, or reaffirmation; failure to do so will result in the stay order of collection activities being terminated. A Chapter 7 debtor may not retain possession of purchase money collateral beyond forty-five (45) days from the meeting of creditors without redeeming the collateral or reaffirming the debt.
Non-purchase money security liens.
If you have borrowed money and pledged consumer goods (which you already owned) as collateral and these consumer goods are also exempt personal property, any lien on these consumer goods may be canceled. In order to do so, a motion must be filed with the bankruptcy court and a hearing must be held on this motion. Additional fees are charged for this service. This lien is called a Non-purchase money security lien. This cancellation process does not apply to money borrowed to purchase new or pre-owned consumer goods; it does not apply to motor vehicles.
How long does a bankruptcy take?
After you have retained your attorney, it takes approximately 2 to 4 weeks to prepare the paperwork. The paperwork is complex and extensive and will require you to provide detailed information about your debts and financial condition. Until all information is gathered, your petition cannot be filed with the Court.
Once your petition is filed, the court will schedule a hearing within 30-60 days. This first hearing is called a creditor's meeting and each debtor's attendance is mandatory. At this hearing you will be questioned about your financial status and accuracy of the information in your petition.
In a Chapter 7 bankruptcy, approximately 120 days later, if no one contests the proceeding, the Court will discharge you from your debts.
In a Chapter 13 bankruptcy, you will get a discharge only if you make all the payments of the plan.
Read and understand your petition, schedules and disclosures.
You will be provided many documents to read and understand before you file bankruptcy. You must read these disclosures; they contain important information that will prevent problems after filing your bankruptcy. Before your bankruptcy is filed you must proof read all documents to be filed. You must sign your name affirming the accuracy. This final check of accuracy is extremely important. Only you can verify your records are accurate. Failure to do so can be disastrous, leading to a denial of discharge of all or parts of your debts. It can be used against you later to prove fraud in a criminal proceeding against you because your information is not accurate. Do not casually read your court documents. If something is not accurate, bring it to our attention immediately.
Credit counseling mandatory before you can file for bankruptcy.
The new law mandates a credit briefing or counseling session (the "Consumer Credit Counseling Class") for the debtor within 180 days preceding the bankruptcy filing, either by telephone or over the internet, by a non-profit credit counseling agency. The briefing will introduce the debtor to the services of credit counseling and assist with a budget analysis. The debtor is required to submit a certificate from the credit counseling agency describing the services provided. The cost of credit counseling is paid by the debtor.
How can a bankruptcy stop my creditors from bothering me?
Once you file your bankruptcy petition, the bankruptcy court enters a stay order directing your creditors to stop any collection activities including phone calls, garnishments, lawsuits, foreclosure sales or repossession activities.
However, if you have filed one or more previous bankruptcy cases within a year of filing the present bankruptcy, your automatic stay may be limited or may not be granted at all. If you have filed bankruptcy within one year before the present case, a stay order with respect to a debt secured by your property or with respect to any lease shall terminate thirty (30) days after filing. It will only continue if the court grants an extension. Any cost of obtaining an extension is an extra fee by my office. Such litigation is not encouraged by this office.
If you have filed bankruptcy more than once within the last year, then you will not be granted an automatic stay without order of the court. Again, this office does not encourage such litigation and the cost and expense is extra in addition to any other fees you may pay this office.
Does bankruptcy hurt my credit rating?
Bankruptcy does not always make it impossible to get credit, but it usually makes it much harder. The fact that you have filed bankruptcy will stay on your credit record for ten years. If you expect to need credit in the next ten years for such things as a car, business, house, furniture, or appliances, you may have to rebuild your credit record from scratch or else deal with merchants who charge higher interest rates and are very harsh when payments are late.
Suspension of legal activities:
Filing of a Chapter 7 bankruptcy or a Chapter 13 bankruptcy proceeding suspends all of your present legal activities. Legal activities include any lawsuits, regardless if you are a plaintiff or defendant. Legal activities also include real estate sales contracts, lease agreements, sales contracts for personal property. Make sure you bring any lawsuit or any uncompleted contract to the attention of your attorney.
Completion of Financial Management Course before discharge.
Under the new law, you must complete a financial management course (the "Personal Financial Management Class") before the bankruptcy court will grant you a discharge of your debts. The cost of this course ranges from $50.00 to $60.00. Failure to complete the financial management course would mean that your bankruptcy was a complete waste of time because you would not receive a discharge of your debts. The financial management course must be completed within 45 days of the first scheduled Creditor's meeting.
Prior to the meeting of creditors, in a Chapter 7 bankruptcy, a copy of your federal and Illinois tax returns for the most recent two years must be provided to the trustee. In a Chapter 13 bankruptcy, the most recent four years of tax returns must be provided. Failure to provide the returns mandates a dismissal of your case unless you can show the failure is due to circumstances beyond your control.
The United States Trustee, on behalf of the bankruptcy court, is responsible for conducting random audits of 0.4 percent (1 in 250) of Chapter 7 and 13 bankruptcies with the purpose of determining the accuracy, veracity and completeness of petitions and schedules. The debtor's failure to cooperate in such an audit is grounds for revocation of discharge under Section 727(d)(4), and the debtor has a duty to cooperate.
Adversary Proceedings and Contesting Discharge.
Any creditor can bring an adversary proceeding against you to contest the discharge of any debt for grounds allowed by law. Typically these are based on allegations of fraud in procurement of the debt or in dealings with your creditor. The U.S. Trustee's office (a branch of the United States Prosecuting Attorney's office) can also file an adversary proceeding to contest your entire discharge of all your debts, if it determines you have acted fraudulently in filing or presenting your bankruptcy to the court or trustee, such as failing to accurately complete your documents, trying to hide assets, lying at the creditors meeting, or other acts of fraud. If the bankruptcy court determines you acted fraudulently, you will be denied a discharge of all or part of your debts. These debts can never be discharged. You also may be prosecuted criminally for fraud. Adversary proceedings are considered separate and distinct from your bankruptcy case. Our fees do not cover representation in an adversary proceeding. Fees are quoted only on a case by case basis.
Policies of our Office
Completion of bankruptcy forms is time consuming, complex and difficult. You must cooperate with this office. Only you have the information necessary to complete the forms. We will not gather records and documents from your creditors. You must perform this task. If you fail to provide documents or information requested, I might terminate the relationship; if I do so, all fees paid are considered earned and no refund is made.
You must answer all questions of your attorney and complete all forms in an honest manner. When asked questions by representatives of the court or the U. S. government, you must answer honestly. Fraudulent misrepresentations made in your bankruptcy proceeding are a crime. The FBI investigates bankruptcy crimes. They are also grounds for denial of a discharge of your debts. These crimes are actively prosecuted by the U. S. Attorney's Office of the Department of Justice. If you lie, you may go to jail.
Read All Documents. Bankruptcy is serious and requires your undivided attention
You are responsible for the accuracy of all petitions, schedules, statements, reaffirmation agreements, motions, etc., filed with the Bankruptcy Court. Carefully review all documents presented to you. If you believe information is inaccurate, or you do not understand the meaning of the document or terms contained therein, then it is your responsibility to bring those issues to the attention of your attorney. Do not sign documents which are incorrect, have inaccurate information, or you do not understand. In addition, you will be provided other documents that you are required to read prior to the creditor's examination. Only you can verify the accuracy of your documents
Each debtor must undergo examination. You must personally appear, be placed under oath, and answer questions concerning your bankruptcy. Attendance at creditor's hearings is mandatory and failure to attend means that your proceeding may be dismissed. Creditor's hearings are not continued except for extreme emergencies, such as hospitalization or death. Continuances, which are caused by you, may result in additional charges. You will be required to bring records or documents of your financial condition to the creditor's examination.
Chapter 7 and Chapter 13 Fees.
Fees are quoted over the phone.
You are invited to make an appointment to see me, personally, to answer any additional questions or to start your bankruptcy.
DAVID L. STRETCH
For an appointment call 815-578-0055.