Chapter 7 and Chapter 13 Bankruptcy Matters

What is the difference between Chapter 7 and 13?

Chapter 13 is specifically for the repayment of debt, whereas a Chapter 7 generally involves no distribution to creditors. As a result, there are significant differences ranging from the time the case will be pending, to the likely actions of the Trustee, the property that you will keep or potentially lose, and the fees to be paid to the attorney. Generally, a Chapter 13 will require years and not months to complete, there will be payment to the creditors, and the fees paid to counsel will be significantly greater than in a Chapter 7.

How do I know which type of bankruptcy is best for me in Joliet: Chapter 7 or Chapter 13?

This is a hard question to answer without the aid of a Bankruptcy attorney, which is why our office provides for free, initial consultations. A starting point would be comparing the benefits of a Chapter 13 against those of a Chapter 7. If you think a Chapter 13 could be the best option, you would then need to determine if you had income sufficient to fund the plan. Since there are any number of different issues that impact the final decision, no determination should be made until you have consulted with an experienced Bankruptcy attorney.

NOTE: Please contact our office to obtain questionnaire and debt listing form.

Is there such a thing as a Medical Bankruptcy?

No. You cannot pick and choose who you are to bankrupt. Full disclosure in required in any Bankruptcy filing and the pleadings are signed under penalty of perjury. To insure such complete disclosure, all Trustees will ask the same two (2) basic questions and the answers to which must be “Yes.” First, did you list all of the property in which you have any interest? And, secondly, did you list everyone to whom you owe money? Should some property or creditor have been omitted, the Bankruptcy would then need to be amended.

What if I owe money on my car? What choices do I have?

There are a number of choices available to you. You can elect to surrender the car and have no further obligation to the creditor. You can also look to reaffirm on the debt and keep the car. A reaffirmation is an agreement between you and your creditor that reaffirms the debt, which means that the Bankruptcy is of no effect. You can keep the car, but, if you were to default, the creditor could not only repossess the car, but sue for any resulting deficiency. Because those rights would be retained, all such agreements are filed with the court and subject to review of your ability to pay. Consultation with a Bankruptcy attorney is suggested as you may wish to redeem (i.e. cash out the debt) or take some other course of action.

In a Chapter 13, you may have additional options. You may elect to continue to pay the Note directly. It may also be possible to restructure the Note with reducing the principal and/or reducing the interest rate.

An experienced Bankruptcy attorney can assist you in any decision that you make. This is especially important as a reaffirmation effectively renders the Bankruptcy of no effect and can leave you facing a deficiency for any subsequently repossessed vehicle.

What is the MEANS TEST?

This is the eligibility test created by the Congress when it amended the Bankruptcy Code in 2005. Simply stated, the Debtor’(s) household income is compared to similarly situated household in your state with the same number of dependents. The basic goal is to compel higher income level Debtors to file Chapter 13 Bankruptcies by making Chapter 7 unavailable. This will result in a 5 year payment plan to your creditors.

How does this MEANS TEST work?

You need to show all of your household cash flow for the past six (6) months. This would include wages, pension, and/or unemployment benefits. It would also include monies received for rent or contribution to household expenses. It even needs to include the monies provided by your spouse, even if he/she is not looking to file Bankruptcy.

This tends to be a complicated process and one best left to a Bankruptcy attorney. In the event that your “household income” be over the statutory guideline amount, any Chapter 7 filing would be subject to a motion to dismiss for abuse. Additionally, the amount of the resulting payment plan is be determined by the results of these computations.

NOTE: This is why it is key that all of your sources of income and cash flow are disclosed to our office at our initial meeting.

Why is the MEANS TEST important to me?

First and foremost, its completion is a requirement in all consumer bankruptcy filings. The MEANS TEST determines under which Chapter you can file—either Chapter 7 or Chapter 13. It may be that your income is at a level that is below MEANS TEST figures and it is of no effect. Depending on other factors, you could then elect to file for Bankruptcy under Chapter 7. It is also possible to rebut the presumption of abuse and file for relief under Chapter 7. Again, this is a rather complicated process that involves data entry and very specific computations that would better be left to a Bankruptcy attorney.

Should you be unable to rebut the presumption of abuse, a Chapter 13 would be the only Bankruptcy filing available to you. A five year repayment plan would then need to be filed with the Court that aligns itself with the final computations of the Means Test.

How can this presumption be rebutted?

It is an involved process that depends upon your personal situation. The Congressional goal was to standardize the computations. As a result, a six (6) page form (known as Form 22) is to be completed that sets forth certain statutory allowed expenses, such as food, transportation, and housing. This data is then supplemented with some, but not all, of your actual expenses. Examples of allowable expenses would be actual mortgage expenses, taxes on wages, union dues, child support payments, health care costs, and educational expenses. Once all of the data is inputted, many people find the presumption has been rebutted.

What is the “AUTOMATIC STAY” in Bankruptcy and what does it do?

The AUTOMATIC STAY is greatest Debtor’s aid in the Bankruptcy Code. Through the simple act of filing for Bankruptcy, ALL collection actions must stop immediately. Advance notification of a Bankruptcy filing is not required. There is no application made to the court and no hearing is required. The Stay simply exists. The creditors and various collection agencies are entitled to notice. However, all collection efforts must cease effective upon the date and time of the filing. Their actions are stayed automatically. Hence, the name: Automatic Stay.

Is there ever a time when no “AUTOMATIC STAY” exists?

The answer is yes. There are a couple of instances. First, if you have previously had Chapter 13 Bankruptcies dismissed, the Stay may only issue for 30 days or you may only secure such a Stay upon application to the Court. The Congressional purpose here was to protect creditors from serial filers—those people who continue to seek Bankruptcy protection but fail to comply with the various requirements of the Bankruptcy Code.

A failure to pay an obligation can also result in the Stay being removed. This obtained by a creditor’s filing a Motion to Lift Stay. Provided the creditor makes the appropriate allegations and the Court concurs, the Bankruptcy protection offered by the Automatic Stay will be removed as to this particular creditor. There are a number of reasons for such motions and there can also be a number of defenses to such motions. An experience Bankruptcy practitioner can explain this to you and whether such Motions should be expected in your case.

What is a Chapter 7 Bankruptcy and what can I expect?

A Chapter 7 Bankruptcy will generally take about three (3) to four (4) months from filing to discharge. A sworn pleading detailing all of your income, expenses, assets, indebtedness, and financial history needs to be filed with the Court. Generally, the process can be viewed as the method by which individuals can lose their debt through discharge, while retaining their property. The key here is that the property to be kept is either fully liened (i.e. pledged to a creditor) or subject to exemption (i.e. protected from creditors by statute). This issue of exemptions is a critical issue to any filing in Bankruptcy. Because you need something, such as a car for work, it does not mean that you can keep it. It must be exempt or it is at risk for turnover to the Trustee. Illinois has very specific exemption provisions and care needs to be taken to insure that you will not be placing your property at risk by filing for Chapter 7. This is an issue to be discussed with a Bankruptcy attorney, who can advise you in such matters.

The Trustee in a Chapter 7 is a court appointed official who is charged with determining whether or not any assets are available to distribution to creditors. You will need to be examined under oath before that Trustee. The Trustee’s job is to insure the accuracy of your pleadings and determine if there are any assets for administrations to unsecured creditors, such as credit cards or hospitals. If such assets are found to exist, the Bankruptcy will remain open for an extended period of time until a court approved distribution to your creditors occurs and the Trustee can then close the Estate.

At the conclusion of the case, a discharge is to be entered. As there are issues that could preclude the entry of such an order, either to all or some of your creditors, this is an issue to be discussed with a Bankruptcy attorney.

As to the fees charged, attorneys are able to set their fees as they wish. All fees, however, need to be disclosed to the Court and all contracts filed with the Clerk for review by the sitting Judge. The attorneys fees charged by our office for Chapter 7 Bankruptcy is based upon the level of work required. For example, where rebutting of the presumption of abuse is required due to income in excess of the Means Test, those fees would be greater than where the income is under the Means Test.

What is a Chapter 13 Bankruptcy and what can I expect?

People generally file for Chapter 13 because they are not eligible for a Chapter 7 due to a prior filing. Additionally, they have 1) a house in danger of foreclosure and the Chapter 13 is filed to reinstate the mortgage and pay the arrears over the course of the plan; 2) non-dischargeable debts, such as back taxes, that need to be paid under the protection of the Bankruptcy Court and the Automatic Stay; 3) wish to retain the non-exempt assets, which commonly occurs where people are asset rich (with equity in car or house), but cash poor and unable to service their monthly obligations; 4) a house that has lost so much value that the lien can be stripped for the debt owed on a junior mortgage (i.e. avoid both the mortgage and note) or 5) due to the requirements of the Means Test or, after filing, income in excess of their remaining monthly expenses. Consultation with an experienced Joliet/Bolingbrook area Chapter 13 attorney will allow you to determine if any of these categories apply to you.

A Chapter 13 Bankruptcy is commonly referred to as a “Wage Earner’s Plan.” This is because monthly payments are made to the Trustee, who, in turn, makes payment to your creditors. Plans generally run between three (3) and five (5) years. Where the income is in excess of the Means Test, the duration is to be sixty (60) months. The critical requirement here is that you have sufficient cash flow to fund the plan after payment of your regular monthly expenses. Upon completion of the plan, as with the Chapter 7, a discharge will issue.

As to plan payments, the Congress, in its attempt to standardize Chapter 13 filings, also attempted to standardize the formula for payments to creditors. As a result, it is possible that the MEANS TEST will set the monthly payment amount for an above-means Debtor in a Chapter 13. It is also possible that the repayment plan could be as low as $0.10 on every $1.00 owed. As a result, you may be able to avoid not only the payment of interest on a debt, but greatly reduce the total amount to some percentage of the total debt.

If you were eligible for a Chapter 7, why would you file a Chapter 13?

Chapter 7 proceedings are not for everyone. The MEANS TEST is not the only reason to file for relief under Chapter 13. There are four (4) major reasons to file Chapter 13:

  1. First, you may not actually be eligible for a Chapter 7. In 2005, the time between Chapter 7 filings was extended to eight (8) years. As such, you may find yourself statutorily ineligible for a Chapter 7.
  2. You could be “asset rich and cash poor.” For example, you may not be able to service all of your credit debt and be facing collection suits, but you have no car payment or have equity in your house or some other asset, the value of which exceeds the exemptions allowed under Illinois law. A Chapter 13 allows you to keep any such non-exempt assets and to pay creditors a like amount over the term of the plan.
  3. Your house is either in foreclosure or facing foreclosure. A Chapter 13 allows for you to stop the foreclosure process instantly, compels the mortgage company to accept future monthly payments, and allows for payment of the arrears over time.
  4. Your first mortgage is greater than the current value of your house. A Chapter 13 allows for the stripping of your other mortgages and avoids payment. These junior mortgages would be treated like a credit card debt and be discharged upon completion of your plan. The only mortgage that would remain would be the first mortgage.

Are there other benefits to a Chapter 13?

Yes. A Chapter 13 plan will allow you to protect co-signers from collection. You can also use a Chapter 13 to pay non-dischargeable debts, such as taxes and child support. Individuals, who simply feel compelled to pay something to their creditors, can also elect to file a Chapter 13.

I do not want to list a family member on my Bankruptcy, can I simply pay him/her back before filing for Bankruptcy?

The general rule is NO. While there may be some exceptions that should be discussed with an attorney, most repayments would be subject to challenge. Under both Illinois and Bankruptcy law, the payment would most likely be construed as payments to an insider during a period of insolvency for an antecedent debt to the detriment of your other creditors and, as such, subject to avoidance. Simply stated, you took the little money you had and elected to pay a family member rather than some other creditor. A court order would be sought for the repayment of those funds by the person you paid.

A key point here is that the absence of any fraudulent intent is of no real importance. The problem arises by virtue of the actions, not the underlying intentions.

If I have an asset, can I simply give something away or “sell” it to a family member?

The general rule is, again, NO. Caution must be observed with any property transfer. Just as any payment to a relative would most likely be viewed as an improper preferential payment, so would such a transfer. Simply stated, the likely result would be an assertion that you transferred something for less than its value to the detriment of your creditors. Again, there may be some exceptions and you should consult with an attorney before attempting to make any such transfers, whether by sale or gift.

As with any payment to a relative, fraudulent intent in the sale is not the key. While it could be a factor, the problem still arises by virtue of the actions, not the underlying intentions.

Do both husband and wife need to file?

No. The key is how the debts are allocated between the spouses. For example, if a spouse is only liable on the mortgage and the car note, both of which are to be retained, there may be no reason for a joint filing. Similarly, should you have recently married and the spouse brought an excessive amount of debt into the marriage, an individual filing may be in order.

However, as noted below, the income of the non-filing spouse would have MEANS TEST implications and would need to be disclosed on the filing spouse’s petition. The law does allow for certain deductions from such net income. Examples of which would be the non-filing spouse’s car payment, student loans, or credit card payments.

Although I am not married, I live with someone, does this affect my filing Bankruptcy?

The answer to this question, as with a joint or non-joint filing, is complicated. While you have a right to file for Bankruptcy, the fact that you are living with someone has MEANS TEST implications on any such filing. Since this person is part of your household, he/she would count towards your household number. Also, the net income contributed to your household would also count towards the income computations.

In short, this combined household income would have MEANS TEST implications on your underlying Bankruptcy eligibility for a Chapter 7. You should be sure to bring a pay record for his/her last six (6) months of income with you so we can assess your situation.

How can I set an appointment to meet with you?

We represent Debtors in the following counties: Will, Grundy, Kendall, LaSalle, DuPage, Kane, or Cook Counties, you can call our Joliet office at 815-725-8000 and ask to set an appointment.

To insure we have sufficient information, we ask that you complete our questionnaire as best you can prior to that appointment. While all of the information may not be applicable to you, we do ask for your six (6) months of cash flow, including paystubs, a listing of everyone to whom you owe money, and a listing of all your property. You can click here to obtain and download these relevant forms:

Questionnaire

Debt Listing Sheet