Many people believe that changes to the bankruptcy law that were passed in 2005 have made it virtually impossible for individuals to qualify for debt relief through bankruptcy.  While the 2005 law, the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA, has made it more complicated, the reality is that most people who need to file for bankruptcy can still do so.

So what exactly is bankruptcy?  Basically, bankruptcy is a legal proceeding that allows people with more debt than they can repay to start over – financially speaking.  This is why bankruptcy is often referred to as a “fresh financial start.”  Once you file for bankruptcy, creditors must immediately stop trying to collecting the debts that you owe.  Depending on what bankruptcy chapter a person files under, nearly all unsecured debts can be discharged – which eliminates the legal obligation to repay them.  Unsecured debts are those with no collateral, such as credit cards.  Secured debts, such as car loans and home mortgages, must still be repaid if the debtor wants to keep the property.  But if they are behind on payments, filing for bankruptcy can stop a repossession or foreclosure by allowing the past due amount to be repaid over time while the regular payments continue.

While there are various local rules and state laws that come into play in bankruptcy proceedings, the primary source of bankruptcy law is Title 11 of the U.S. Code.  Because bankruptcy is federal law, bankruptcy cases are filed in the federal court for the district in which the debtor resides.  For example, because I am a Chicago bankruptcy lawyer serving Chicago area residents, my clients’ cases are filed in the United States Bankruptcy Court for the Northern District of Illinois.

There are four different types of bankruptcy cases under Title 11:  Chapter 7, Chapter 11, Chapter 12, and Chapter 13.  Of these four, Chapter 7 and Chapter 13 are the most common and most helpful to individuals.  Chapter 7 is called straight bankruptcy or a liquidation and requires individuals to give up property to repay their creditors.  Because of the various state and federal exemptions that protect certain property from liquidation, most people who file for Chapter 7 bankruptcy don’t lose any property at all.

Chapter 13 is also known as a reorganization.  Chapter 13 allows people to repay all or some portion of their debts over time using future income.  No property is liquidated under a Chapter 13.

While this overview provides a basic overview, it is not legal advice.  Bankruptcy law can be complex and people considering bankruptcy should consult with an attorney in their jurisdiction.  If you live in Cook County, Illinois and are seeking a Chicago Bankruptcy Attorney, give me a call or contact me online to schedule your free consultation today

So how can bankruptcy help you? A successful bankruptcy case can offer many benefits.  Bankruptcy may make it possible for you to:

• Wipe away your debts.  The ultimate goal of a bankruptcy case is a “discharge.”  A bankruptcy discharge eliminates the legal obligation to pay most kinds of debt.  For many filers, the bankruptcy discharge eliminates all of their debts.  The discharge is why bankruptcy is often seen as the path to a fresh financial start.
• Stop a bank from foreclosing on your home.  Although you’ll still have to keep paying your mortgage in order to keep your home, Chapter 13 bankruptcy can give you a chance to catch up on your mortgage if you’re behind.  It is also possible to eliminate second mortgages if the value of your home is less than the balance of the first mortgage.
• Keep the repo man from taking your car, or even get your car back from the creditor if its already been repossessed.  Chapter 13 bankruptcy can also give you a chance to get current on your car payments.
• Stop wage garnishments, also known as wage deductions in Illinois.  If you’ve been sued by a creditor and have received a Wage Deduction Notice or Citation to Discover Assets from your creditor’s lawyer, I urge you to call me at (773) 701-4050 ASAP.
• Prevent ComEd from turning off your electricity, or get it turned back on if they already have.
• Stop the endless barrage of letters and phone calls from nasty, aggressive debt collectors.

Bankruptcy can’t solve every financial problem.  I’ll cover some of the problems that bankruptcy can’t take care of in the next article in this series.  However, bankruptcy offers solutions that put consumers and their families on a better financial path every day.

Call me if you’d like to discuss how bankruptcy can help you with a Chicago bankruptcy attorney.

Unfortunately though, bankruptcy isn’t the perfect solution in every situation.  There are just some problems that are tougher to solve than others.  It’s important to consider these types of problems with councel from a good bankruptcy lawyer.

For example, even though bankruptcy can eliminate most debt, filing for bankruptcy won’t allow you to keep secured property that you can’t afford to keep paying for.  You can keep secured property if you can keep current with the payments, but bankruptcy typically doesn’t eliminate a creditor’s lien.

The good news is that, if you can afford your payments going forward, you can make the lender accept payments on any past due payments over time in a Chapter 13.  Additionally, if you know you can’t afford the payments and decide to give the property up, the bankruptcy can erase your obligation to pay anything additional to the creditor.

There are also certain kinds of debt that get special treatment under the Bankruptcy Code.  While these types of debt aren’t technically impossible to eliminate, they are extremely difficult to have discharged.  The toughest are student loans.  Under the current law, student loan debt is all but impossible to get discharged in bankruptcy.  Child support and alimony debts are also typically nondischargeable, as well as court restitution orders and criminal fines.

Most tax debts are generally not discharge in bankruptcy either.  However, in certain circumstances income taxes can be discharged.  Look for an upcoming series of articles about dischargeability of tax debt, as it is a complex area of bankruptcy law.

You cannot protect cosigners with bankruptcy.  If you get a bankruptcy discharge on a debt that someone cosigned for you, your cosigner will still be liable for the debt unless he or she files as well.  A cosigner does get the temporary protection of the automatic stay in a Chapter 13, though.

Finally, a bankruptcy discharge will not eliminate any debt incurred after your case is filed.  Therefore, if you have known necessary expenses coming up such as medical bills, it may be advisable to hold off on filing.

If you’re wondering if filing for bankruptcy might be a good option for your debt troubles, you should talk to a Chicago bankruptcy attorney.  Call me to set up a case evaluation.  (773) 701-4050

Chapter 7, sometimes called straight bankruptcy or liquidation is basically a trade-off.  The debtor gives up his or her property to be sold, or liquidated, with the proceeds going to his or her creditors.  In exchange, the debtor’s legal obligation to pay most or all of his or her debts is eliminated.  The debts get wiped away and the filer is left with a clean slate.  The best part is that Illinois law provides for certain property to be exempt from liquidation.  This means that, generally, those who file Chapter 7 keep all of there property except property that is very valuable or secured property that they can not afford to continue paying for.

Chapter 13 is a reorganization.  People who file under Chapter 13 enter into a payment plan which is approved by the court and administered by a Trustee.  The payment plan lasts for 3 to 5 years, and the remaining unsecured debt can be discharged at the end of the plan.  The plan is based on what the debtor can afford to pay.

Most people filing for bankruptcy file under either Chapter 7 or Chapter 13.  Either chapter is available to individuals or married couples filing jointly.

You won’t have to give up all of your property, though.  In fact, most people who file for Chapter 7 don’t give up any property at all.  The Bankruptcy Code allows you to “exempt” certain property.  What you are allowed to exempt typically depends on the state in which you live.  In Illinois, the available exemptions are determined by state law.  Property which is not exempt is sold by the trustee assigned to the case and the money goes to your creditors.

If you’re behind on your mortgage payments and are looking for a way to catch up and keep your home, Chapter 7 probably isn’t the right solution for you.  While it’s possible to keep your home in a Chapter 7 case, you have to be current with your payments because your lender still has the right to start foreclosure proceedings if you’re not. The same holds true for your car and other secured property.  A Chapter 13 could allow you to catch with these types of debts, though.

If your income is above the median family income for households of your size in Illinois, you may be required to file a Chapter 13.  As of March of 2012, the median income for a single earner is $45,545 per year.  It is $79,074 for a family of four.  Households with higher incomes have to file a completed Form 22A – known as the means test.  If the means test shows that, after paying your necessary expenses based on standards in the law, you would have enough left to make payments to your unsecured creditors, then the court could decide that Chapter 7 is not available to you.

The means test can be complex, but I have helped above-median income clients file successful Chapter 7 cases.  Do you have questions about whether Chapter 7 might be possible for you?  Use the “Get Started Now” button at the top of the page to set up a free consultation.  Or just call me at (773) 701-4050.

Additionally, when married couples file jointly, each spouse is entitled to the full exemption for a total of $30,000.  This is known as doubling.

So, assume for example, a couple filing Chapter 7 owns a $150,000 home with $125,000 remaining on the balance of their mortgage.  Their equity in the home is $25,000. Each spouse can exempt up to $15,000 of equity in their homestead from the bankruptcy estate.  The couple can protect their entire $25,000 of equity in the home.

On the other hand, if the couple only owed $110,000 on the home, they would have $40,000 in equity but would still only be able to protect $30,000.  The trustee could then liquidate the home, pay the couple their exempt equity of $30,000, and use the remaining $10,000 to pay their creditors.  However, considering the expenses of selling a home, if there was little to gain by liquidating the home, the trustee may abandon the property and allow them to keep the property if there is only a small amount of non-exempt value.

Illinois also recognizes tenancy by the entirety with limitations.  Tenancy by the entirety is the subject of another post.

When you file a Chapter 13 case, you are proposing a plan to the bankruptcy court that lays out how you plan to use your disposable monthly income to pay off some of your past due debts over three to five years.  Your disposable monthly income is what’s left of your income after necessities like housing, utilities, food, clothing, transportation, etc.

The best part about filing for bankruptcy under Chapter 13 is that it will allow you to keep valuable property such as your condo or your car that you wouldn’t necessarily be able to keep.   If you have enough income to make your current payments going forward, and to catch up on over due payments through a Chapter 13 plan, then this is an option that we should talk about.

You should consider a Chapter 13 plan if you own a house or condo, but are in danger of foreclosure because you’ve fallen behind on the payments.  If you are behind on your bills, but just need some extra time to catch up, then Chapter 13 is a good option, too.  Finally, if you have valuable property that is not exempt in a Chapter 7, but you can afford to pay your creditors over time, 13 might be a better way for you to go.

You’ll need to have enough regular income over the course of your Chapter 13 bankruptcy to pay for your necessities and to keep up with the required plan payments.  You can send me an email through the form at the bottom of this page if you’d like to set up a time to get more information.  Case evaluations are always free!