Illinois Bankruptcy Information Guide

Illinois Bankruptcy Information Guide (1)

#1. Someone told me that Bankruptcy no longer exists. Is that true?

No. The Bankruptcy laws changed October 17, 2005. Bankruptcy is still available to individuals and businesses who are in need of relief from their creditors.

#2. What is the difference between the different types of Chapters of bankruptcy?

The short answer is that a Chapter 7 is the bankruptcy where you don’t have to pay anyone and Chapter 11 and Chapter 13 are the bankruptcies where you have to pay all or a portion of your Creditors.

A more detailed answer is that a Chapter 7 is a liquidation form of Bankruptcy available to individuals and businesses. A Bankruptcy trustee is assigned to your case.  He will perform certain duties.  One of the Trustee’s most important duties is to evaluate your case to see if your property (assets) are valuable enough to sell (liquidate).  The Trustee subtracts most liens, such as mortgages and automobile loans, from the value of the the individual items as part of determining the value.  The Trustee also subtracts “exemption” (which are not available to businesses) you may have in, or be able to apply to, the value of the property along with an estimate of the selling costs and expenses in making the determination.

If the Trustee projects that no “net funds” or only a small amount of “net funds” will be generated by selling your property the Trustee will determine your case is a “NO ASSET”case and you will most likely be able to keep your property and, if you are an individual (or married) filer you will receive a “DISCHARGE”.  Receiving a BANKRUPTCY DISCHARGEis ordinarily the purpose of an individual bankruptcy.  The vast majority of individual bankruptcies filed are individual “NO ASSET” cases where the people who file get to keep their property.  Businesses do not get a Bankruptcy Discharge, they simply cease doing business.

A Chapter 13 Bankruptcy is a repayment form of Bankruptcy available to individuals. This form of Bankruptcy  may be the only form of bankruptcy available to individuals who have “NET FUNDS” (see the discussion of this term above) or high income.  This form of bankruptcy can also be used to force mortgage creditors, automobile lenders and other creditors to take a repayment agreement.  It usually is not necessary to repay your creditors the full amount of their debt in a Chapter 13.

A Chapter 11 Bankruptcy is available for some individuals who do not qualify for Chapters 7 or 13, generally because they have high income but their debt is in excess of the Chapter 13 debt limits.  Chapter 11 is most commonly used by businesses which need to make adjustment to their debt to operate successfully. Chapter 11 is a very complex repayment form of bankruptcy.  The majority of Chapter 11 Bankruptcy Plans are never completed, so an actual Chapter 11 Discharge is unusual.  The parties which file a Chapter 11 Bankruptcy are often, none the less, able to achieve many of their debt objectives through agreements made to settle debts outside of bankruptcy.

#3. Will they take my car if I file for Bankruptcy?

Most people are able to keep their home and automobile, if they wish to do so, when they file bankruptcy, regardless of the Chapter under which they file, if they are able to make payments on them.  The Bankruptcy Court does (and your attorney is required by law to) individually consider each debt you agree to continue paying after bankruptcy to determine whether you can afford to pay it, and whether you will be allowed to continue paying on it.  The Court can deny your being allowed to keep a car for a number of reasons, including that continued payment does not represent a good value or if the expense is inappropriately extravagant so that your continuing to pay on this debt is unfairly using money which should be made available to other  creditors.  The issues can become complex in individual cases.

#4. Will they take my tax refund if I file for bankruptcy?

A tax refund is considered an asset in Bankruptcy, and a determination has to be made as to whether it will be taken or otherwise recovered by the Bankruptcy Trustee and used to pay your creditors.  People who file “Chapter 7”  Bankruptcy are allowed to elect to keep certain property by applying “general personal property exemptions” to property which they wish to keep.  The amount of these exemptions vary from state to state.  A Chapter 7 Bankruptcy filer may be able to apply to protect all or a portion of their refund by applying an exemption to the refund.  In addition, timing a Chapter 7 Bankruptcy filing properly and expending the refund on expenses which the Bankruptcy Trustee will not be interested trying to recover or which are otherwise acceptable under bankruptcy laws, can result in you having the ability to use a refund in the manner which is most consistent with your financial needs.  In a Chapter 13 repayment form of bankruptcy the Trustee normally requires the income tax refund be applied toward payments to the Chapter 13 Creditors.

#5. Will my employer know I filed for Bankruptcy?

Although Bankruptcy is of public record, generally your employer, neighbors or friends will not know unless they search for it, or unless someone tells them. Our experience is that it is normally the individual Debtor who inadvertently tells an employer or others who “find out”  that they filed.  However, you may be forced to notify your employer if  you intend to stop a wage garnishment or for similar purposes.

#6. What happens with the taxes I owe?

Some taxes can be discharged in Bankruptcy. Generally, in Chapter 7 Bankruptcy, if you owe income taxes for a tax return which has been due for at least three years, including extensions, and on file with the IRS, State, or other taxing body, for at least two years you may file bankruptcy on the tax due.  For most people, as of the date this answer is being written (June 10, 2011) this means you may file bankruptcy on income taxes you owe for tax years 2007 and prior provided you filed the return more than two years ago.

General Example:  Your 2007 Federal 1040 is due April 15, 2008.  Three years after the return is registered on the books of the IRS (the assessment date not the date you filed it) you may declare bankruptcy on that tax )and on any earlier tax years which you filed with the IRS at least 2 years before you file bankruptcy), if there has not been some intervening event which has extended the general dischargability date.

In Chapter 13 Bankruptcy you are required to pay your income tax debt as part of the bankruptcy plan.  This can make it difficult, if not impossible for some individuals to ever file a Chapter 13 Bankruptcy.  There are a multitude  of ways, however, to deal with tax and other debt and most people are able to be helped through one or the other of these techniques.

It is usually best to consult with an attorney with experience in dealing with these specific matters to be sure you don’t inadvertently miss an opportunity to minimize your tax debt.

#7. I have a loan for my computer (or my TV or my furniture). Do I have to return it after I file for Bankruptcy?

Items like a computers, televisions furniture and/or jewelry can be considered secured items, similar to a car with an auto loan. If you took out a loan specifically to purchase these items or used a “store credit card”  (for example a Best Buy, Circuit City, J.B. Robinsons, or similar store card)  to purchase these items, generally you will have to continue paying for them if you wish to keep them.  In Chapter 7 you will usually sign a document called a “reaffirmation agreement” which is a contract where you agree to pay to keep the secured property.  The Court reviews these agreements and usually approves them unless there is some reason not to (such as,you can’t afford it, the item is inappropriately extravagant or the item is a poor value due to a high price or interest rate)

In a Chapter 13 repayment form of bankruptcy, if the secured item you keep is appropriate as a living expense and does not represent an extravagance you will be allowed to keep the item and will most likely have to pay for the item as part of the Bankruptcy repayment plan.

#8. I have a credit card with a low balance. Can I exclude it from my Bankruptcy?

No, regrettably enough when you file for Bankruptcy all of your creditors must be included. The law does not allow you to treat any creditors according to your own plan.  Everything is subject to the Court.  Credit card companies and other credit providers know this and they will most likely cancel the card or line of credit anyway whether they are listed or not.  In an electronic world there is no keeping bankruptcy information from a credit card company.

#9. Does Bankruptcy stay on your credit report for seven years?

Your Bankruptcy will show on your credit report for up to ten years. People can begin reestablishing credit immediately after they file, in a variety of ways.  Credit providers generally only “hold a bankruptcy against you” for two or three years after filing.  After that point they look at how you have done on paying your debt after bankruptcy.

#10. Will all of my creditors stay on my credit report after my Bankruptcy?

Yes, Bankruptcy does not erase your creditors from your credit report. If you receive a discharge on your bankruptcy, experienced credit report readers will know that your liability to creditors which predate the Bankruptcy are discharged.  Since you no longer owe any creditors money it becomes possible to extend you credit again.  There is less worry that you are overextended, or that you will be sued and garnished and not be able to pay the new debt.

#11. Will I be able to purchase a home after Bankruptcy?

The General Answer is Yes. We have had clients purchase homes very shortly after their Bankruptcy is over.  In the current economy the requirements to qualify for a mortgage are high and a purchase of this type would require more work and planning by the purchasers.  The Bankruptcy Court also has the ability to readily take “monetary windfalls” which come into the hands of bankruptcy filers within 6 months of filing bankruptcy.  Gifts from relatives could fall into this category.  You should consult with an experienced Bankruptcy attorney to determine how to structure a purchase made shortly after bankruptcy if it is a priority for you.

#12. Will I be able to get credit cards after a Bankruptcy?

Yes. Some credit cards companies will actually solicit you after a bankruptcy. Usually these companies offer “secured cards”  where you put down a sum of money and essentially get to borrow “your own money back” at a high interest rate. These cards, along with virtually all credit cards are “a bad deal”.   We usually recommend recommend our clients  avoid most credit cards, use a debit card or other substitute where possible and if you take a card, take only one, and one with a relatively low limit to enable you to conduct business for which a card is necessary.