Frequently Asked Bankruptcy Questions
What are the main differences between a Chapter 7 and a Chapter 13 bankruptcy?
A Chapter 7 bankruptcy is also known as a "straight liquidation." In a Chapter 7 bankruptcy, your non-exempt assets are liquidated and the proceeds are paid to your creditors. Many Chapter 7 bankruptcies are "no asset" bankruptcies, which means that the debtor has no assets to liquidate. Once the discharge order is entered, the debtor is relieved of any debts incurred before filing for bankruptcy.
A Chapter 13 bankruptcy is also known as a "Wage-Earner's Plan." In a Chapter 13 bankruptcy, you repay a portion (or all) of your debts over a 3 or 5 year period. The amount repaid depends on your assets and disposable monthly income. This type of bankruptcy is often used by individuals seeking to save their homes from foreclosure.
Am I eligible to file for bankruptcy?
In order to file a Chapter 7 bankruptcy, you must meet certain requirements. In particular, if you have been granted a Chapter 7 discharge in the last 8 years or a Chapter 13 discharge in the last 6 years, you cannot file another Chapter 7 bankruptcy. You must also pass the means test, which compares your household income to the median income for a household in your area. You must also complete a pre-filing and a pre-discharge credit counseling course. If you have had a bankruptcy case dismissed in the last 180 days for violating a court order, fraud or abuse, or if you requested a dismissal after a creditor filed a motion to lift the automatic stay, you cannot file a Chapter 7 bankruptcy.
In order to file a Chapter 13 bankruptcy, you must have less than $360,475 in unsecured debt (like credit cards) and less than $1,081,400 in secured debts (like mortgages). You must complete the same credit counseling courses that are required of Chapter 7 filers. You must have disposable income left over each month after your expenses are paid. If you don't, you cannot file a feasible Chapter 13 repayment plan, and therefore cannot file a Chapter 13 bankruptcy. If you were granted a Chapter 7 discharge within 4 years of filing your Chapter 13, you cannot file. Also, if you were granted a Chapter 13 discharge within 2 years of filing your second Chapter 13, you cannot file. If you have had a bankruptcy case dismissed in the last 180 days for violating a court order, fraud or abuse, or if you requested a dismissal after a creditor filed a motion to lift the automatic stay, you cannot file a Chapter 13 bankruptcy.
What is the automatic stay?
When any bankruptcy is filed, the automatic stay goes in to effect. The automatic stay prohibits all creditors from continuing their collection efforts on a consumer (lawsuits, collection calls, etc.) Creditors are prohibited from contacting the consumer in any way, shape, or form. The automatic stay remains in effect until the bankruptcy case is over, or until a creditor successfully requests that the stay be lifted.
My income exceeds the median income for my county. Can I file a Chapter 7 bankruptcy?
It is a major misconception that a consumer is ineligible for a Chapter 7 if the consumer's income exceeds the median income for the applicable county. Many clients we see have been told by other attorneys that they are not eligible for a Chapter 7 because their income is above the applicable median income. If the income exceeds the applicable median income, then the consumer must pass the means test.
The means test is a test designed to determine whether an individual is living beyond his means. IRS standards for the applicable household size are used as deductions from the person's income. The income used in the Means Test is the average 6 month salary (referred to as the Current Monthly Income) of the consumer. Deductions for necessary expenses are deducted from the Current Monthly Income.
Secured debts are also used as necessary expenses. Therefore, the mortgage the consumer is contractually obligated to pay is deducted from Current Monthly Income. If after all the deductions, there is a significant surplus (usually around $200 or more), then the presumption of abuse arises. At this point the trustee may file a motion to dismiss the case or the consumer must convert to a Chapter 13.
Can I keep my house if I file a Chapter 7 bankruptcy?
Yes, you can keep your house if you file bankruptcy as long as you are current on the payments and you do not have too much equity. Some lenders will require that you reaffirm the debt in order to keep the house. Reaffirming the debt is entering into a new contract with the lender stating that you are still liable for the debt even though you filed bankruptcy. Most lenders will not require that you that you reaffirm your first mortgage since they have the right to foreclose at any point if you default on your payments.
Can I keep my car if I am current on my payments?
Once again, as long as you are current you will be able to keep your vehicle and are willing to reaffirm. Unlike mortgage lenders, vehicle creditors tend to be aggressive when it comes to reaffirmation agreements. Some will repossess if you do not reaffirm, even though you are current on your payments.
What are my exemptions?
Your exemptions vary from state to state. These exemptions are primarily used in a Chapter 7 bankruptcy to protect assets like homes and cars. In Illinois, some commonly used exemptions are the $4,000 "wild card" exemption, which can be used to protect any assets you choose; the $15,000 "homestead" exemption, which can be used to protect equity in your home; the $2,400 motor vehicle exemption, which can be used to protect equity in your vehicle; and the 100% exemption for social security payments and ERISA qualified pensions. You can also stack the "wild card" exemption on top of any other exemption. This means that an individual filer could exempt $19,000 of home equity or $6,400 of vehicle equity by stacking exemptions.
Can I discharge student loan debt?
Yes, but it is extremely difficult to do so. In order to discharge your student loans, you would have to show that paying them back would impose an "undue hardship" on you and your dependents. The burden is very difficult to meet. You would have to prove that you will not be able to maintain a minimal standard of living if you pay them. You would also have to prove that your circumstances will not be changing any time in the foreseeable future.
Does my husband/wife have to file with me?
It depends on who is liable for the debt. For example, if husband and wife are both on the note for a home loan, then they both would have to file in order to avoid future deficiency liability.
I co-signed for a friend or relative, will my bankruptcy affect them?
Legally speaking, it can. However, this is rarely the case. As long as the person you co-signed for keeps up with the payments he or she should not have a problem. You can always call the creditor and ask if it would be an issue prior to your filing. However, your bankruptcy discharge will not eliminate the co-signer's liability on the debt.
Can I max out my credit cards before filing bankruptcy?
This one of the most common questions we get. Credit card purchases made 90 days prior to filing may constitute fraud. This a fact-sensitive issue. A creditor may object, claiming that you never had the intent to pay it back. In practice, creditors rarely object unless there was a significant increase in the use of the credit card prior to filing. Avoid any luxury purchases if you are contemplating bankruptcy. Generally, we advise clients to keep credit card use to a minimum prior to filing.
How long will it take for my credit score to recover?
It depends. We have had clients re-establish their credit within two years of filing (credit score back to 650-750). These clients were proactive in re-establishing their credit (made timely payments on their vehicles, new credit cards, mortgage payments, etc.). You will receive many credit card offers within weeks of filing bankruptcy. Creditors see someone who just filed a bankruptcy as a great credit risk. As counter-intuitive as it may sound, it actually makes sense. A fresh filer does not have any debts and cannot file a Chapter 7 bankruptcy for another 8 years. Therefore, the creditor is, in a sense, insured that the person will pay their debts.
Will I get fired for filing bankruptcy?
No; any employer who fires an employee for filing bankruptcy is in violation of federal law. Bankruptcy is a federal right and employers cannot discriminate against an employee based on a bankruptcy filing.
Secured debts are debts that are tied to an asset. When a borrower defaults on a secured debt, the lender may repossess the asset to secure payment of the amount owed. The most common secured debts are mortgages and auto loans.
An unsecured debt is not tied to a consumer's assets. When a borrower defaults on an unsecured debt, the creditor will generally sue the borrower to recover the money owed. If the creditor obtains a judgment, this judgment can be enforced by filing a lien against the borrower's property or by garnishing the borrower's wages, among other remedies. The most common unsecured debt is a credit card.
Which debts can I discharge?
Almost all of your debts can be discharged in a bankruptcy.
Some debts cannot be discharged. You cannot discharge criminal fines, fees, or court-ordered judgments. You also cannot discharge civil judgments resulting from personal injury or death caused by your negligence. Most student loans cannot be discharged. You cannot discharge taxes that are less than three years old. If you incurred a debt as a result of committing fraud, you cannot discharge that debt. Alimony and child support payments cannot be discharged.
What are some common bankruptcy scenarios?
Steve Johnson's Chapter 7 bankruptcy:
Steve Johnson is a website developer who lives in Chicago, Illinois. He has $40,000.00 in credit card debt and the mortgage on his Lakeview condominium is in foreclosure. Steve is overwhelmed, and is worried that the credit card companies will sue him and garnish his wages. Steve is also worried that if Bank of America successfully forecloses on his home, the property will sell for less than the amount he owes, exposing him to a potential judgment against him for the difference.
If Steve files a Chapter 7 bankruptcy, he will no longer have to worry about the credit card companies suing him nor the bank coming after him for a deficiency. The Chapter 7 discharge will sever Steve's liability on the debts he incurred before he filed the bankruptcy. Since Steve's credit card debt and mortgage were incurred before he filed, the discharge will sever his liability for those debts. With all of his debts forgiven, Steve can get a fresh start in life without the fear of harassment from his creditors.
Alice Reynolds - Chapter 7 vs. Chapter 13
Alice Reynolds is a dentist who lives in Downers Grove, Illinois. She has 2 properties, one that is her primary residence, and one that is an investment property. Alice's investment property is underwater - she owes more on the property than its current market value. Alice doesn't have any other major debts, but wants to sever her liability on the investment property. She is concerned that if she lets the investment property go into foreclosure, the bank will pursue her for a deficiency judgment.
Assuming that Alice can pass the Chapter 7 means test, and assuming that Alice has no assets that she cannot protect with her exemptions, then a Chapter 7 bankruptcy will allow her to sever any personal liability on her investment property. It will also sever her liability on her primary residence, which may be useful if it is also underwater.
If Alice makes too much money to pass the Chapter 7 means test, or if she has too many unprotected assets, she can file a Chapter 13 bankruptcy. In this scenario, Alice would continue to pay the mortgage on her primary residence as normal, but would elect to surrender her investment property to the bank "in full satisfaction of the secured debt." She will have to pay back some of the deficiency on the investment property if the bank files a claim showing the deficiency amount. This strategy may be risky if there is also a second mortgage on the property. The bank holding the second mortgage can also file a claim for its deficiency to be paid out in the Chapter 13 plan.
Creditors may file claims at their discretion, sometimes creditors file no claims at all. An attorney will never be able to foresee with certainty the actions of a creditor. This strategy needs to be discussed in detail with an attorney.
Mike Smith, Self-employed Chapter 7 filing
Mike Smith owns his own party production company. The bad economy has taken its toll on his business, and his income has decreased significantly. He has taken out numerous loans for the business and has personally guaranteed those loans. Given his decreased income, Mike cannot continue to make payments on his business loans.
Mike can file for a Chapter 7 bankruptcy without having to pass the Chapter 7 means test. Congress has exempted consumers with "primarily non-consumer" debt from the means test. What that means is that a self-employed consumer can make $1.2 million a year and still file a Chapter 7 bankruptcy, so long as the debts are related primarily to the business and not the individual's own consumer use. The policy behind the exemption is that Congress wants to encourage people to start new businesses. Business ventures provide employment for the general population and are essential to a healthy economy. This exemption from the means test does not apply to the liquidation of non-exempt assets. If Mike has significant assets that he cannot exempt, he may want to file a Chapter 13 bankruptcy instead.