Common Bankruptcy QuestionsWhat Most People Want To Know
Common Bankruptcy Questions
Following are some commonly asked questions about Bankruptcy. If you would like a more in-depth look at Bankruptcy, please take a look at an online study guide we have prepared titled, Understanding Bankruptcy.
Can I Discharge All My Debts?
Chapter 7 bankruptcy can help you eliminate most, or all of your creditors, but there are some debts that you may not be able to get rid of. Generally, you can get rid of most credit cards, medical debts, personal loans and debts from accidents.
Debts come in three major categories, in the Bankruptcy Code. They are:
General, unsecured debts – Leases & Co-Signed Debts
Let’s take a look at each category.
Secured Debts:These include debts for your house, your car, and sometimes debts for household goods and furniture.
Your Home: if you have a mortgage on your home, you must either “reaffirm” on the home, or surrender it to the bank. A “reaffirmation agreement” is an agreement between your creditor and yourself and your creditor that says you agree to make payments, and the creditor agrees to let you keep the property. Payments continue as before. If you are behind on payments, the creditor may not reaffirm on your home and may want to proceed to foreclosure. If this is the case, you may want to consider filing Chapter 13 to save your home. Whatever you do, please keep on making payments on your home, if you intend to keep it. If you intend to surrender it in bankruptcy, there is no need to continue to make payments. If a creditor has sued you and obtained a judgment, they may have placed a lien on your home. If this is the case, we may need to file a “Motion to Avoid Lien” to remove the debt. Please discuss this with us, when you come in.
Your Car: you can also “reaffirm” on your car and continue to make payments on it, assuming you are current with the car payments. You can also surrender the car to the creditor. This is sometimes a good idea, if you are “upside down” on the value of the car, or if your car payment is too high. Chapter 13 may offer other alternatives to you to lower the interest rate, or to lower the monthly payment.
Household Goods: If you are buying a computer, a TV, a couch, or other household goods through a store credit card (Dell, Best Buy, etc.), you may have to pay for these items in order to keep them. There may be a way to pay the current used value for them. You can also surrender them back to the creditor.
Some creditors have you write down a list of the household goods you own when you take out a loan. They are taking a security interest in that property. We should file a “Motion to Avoid Lien” to remove that lien, when you file.
Some unsecured creditors must be paid first, if any money is paid in your bankruptcy. These usually include:
· Back taxes;
· Back child support and alimony; and
· Back wages you may owe to a former employee.
Debts that you owe your ex-spouse for your children’s medical debts may be considered in the nature of “child support” and may not be discharged. These debts are also usually non-dischargeable, but there may be exceptions.
General, Unsecured Debts:
The rest of your debts usually fall into a category known as “general, unsecured debts.” These include credit card debts, medical debts, debts from personal loans, and debts incurred when you are involved in a car accident and owe money from this. These are usually debts you can eliminate, but there are specific exceptions set up by the Bankruptcy Code. Here are a few:
Student Loans. These are non-dischargeable, unless you can prove to the Bankruptcy Court that you have no ability to repay them, or that repaying them would result in an “undue hardship” to you and your family. Chapter 13 may help with these debts. Back Taxes. These are non-dischargeable, but there are some exceptions!!! Taxes CAN be discharged, if all of the following conditions are met:
The taxes must be:
- For personal income taxes;
- Actually filed by the debtor(s) or prepared by the IRS and signed by the debtor(s) and then filed;
- Due and owing for at least three years (or two years, if filed late); and
- Assessed by the governmental unit more than 240 days ago.
Again, Chapter 13 may allow you to pay off non-dischargeable taxes.
Debts from Fraud. If you lied to someone to obtain a loan, the debt may be non-dischargeable. If so, the creditor may bring an action against you in Bankruptcy Court to have the debt declared non-dischargeable.
If you have run up a debt just before the filing of bankruptcy, you may have committed what is known as “constructive fraud.” That means that, at the time and place you took out the debt, you did not have the ability to repay the debt, and you either knew, or should have known that you could not pay it. If you have used any one credit card a lot just before the filing of bankruptcy, you may want to consider waiting to file bankruptcy so that you can let the credit card “get cold.” Chapter 13 may be right for you, if you have these debts.
Debts from Drunk Driving, or Driving Under the Influence of Drugs. Most debts from car accidents can be discharged in Chapter 7, but not these debts. You may want to consider a Chapter 13, if you have these debts.
Debts for Property Settlements in a Divorce. In some divorces, one spouse must pay the other spouse for property the first spouse receives. This debt may not be discharged, but it should be listed if you file bankruptcy.
If you are renting property, you have the choice to keep the lease, or to “rescind” the lease. This also includes rent-to-own furniture. If you keep the lease, you must keep paying for the items.
Remember that if you file bankruptcy on a co-signed debt, the creditor has the right to go back on a co-signor and sue them for them money, if you do not pay the debt. You may want to consider reaffirming on this debt, if that is a problem. If you reaffirm on the debt and pay it, it will not show up as a negative remark on your co-signor’s credit report.
If the co-signor makes the payment, you should not reaffirm on this debt: the debt will be their responsibility. So long as they make the payment, your co-signors will be unaffected by your bankruptcy.
Will I Lose My Property?
- Introduction. When you file bankruptcy, all your assets become an asset of your bankruptcy estate. In Chapter 7, you get to pull back and keep everything that is not exempt. The Chapter 7 trustee could sell everything that is not exempt to give money to your creditors.In Chapter 13, you keep all of your property, but you must pay your general, unsecured creditors at least as much as the value of the non-exempt property. Remember: if the property isn’t worth much, the bankruptcy trustee does not want it. If it is over-encumbered (you owe more on something than it is worth), the trustee has no use for it. This accounts for most property people own. Joint Debtors (husband and wives who file bankruptcy together) can each claim an exemption.Click here for help valuing your used cars.Click here for help valuing your recreational vehicles, motorcycles, and boats.
- Iowa Exemptions.
Each Debtor can claim the following as exempt:
Bank account & misc. property: $100
Cars: 1 car with $4,000 of equity
Household goods & furnishings: $2,000 of household goods (the “used” value)
Homestead: this is 100% exempt, but the house can be sold to pay debts incurred before the home was purchased
Worker’s Compensation: 100%
Accrued wages and Tax Refunds: $1,000
Pensions: 100%, in most cases
IRA’s: 100%, in most cases
Social Security/Disability payments: 100%
There may be other exemptions available.
- Illinois Exemptions.
Each Debtor can claim the following as exempt:
Homestead: $7,500 of equity
Personal property: $2,000
Car: $1,200 of equity
Personal injury awards: $7,500
Worker’s Compensation awards: 100%
Social Security/Disability payments: 100%
There may be other exemptions available.
Things NOT to do before Bankruptcy!
Hiding Assets: During our initial interview, I will ask you a number of questions about items that you own. I will also ask you about money other people may owe you (inheritances, loans you have given to other people, etc.). I need you to be 100% honest with me because when we prepare your bankruptcy papers, we must report these items to the Bankruptcy Court.
Sometimes, I have clients who I warn may face a problem with a debt, or a particular piece of property and they ask me, “But do we have to tell the Court about that?” It’s an honest question. Here’s the answer that I give: “The Good news is it’s a federal prison, and you get to meet some interesting people, but the BAD NEWS is that it’s still FIVE YEARS IN PRISON and a $500,000 FINE if you lie on your paperwork, and the worst news is that your attorney gets to go with you!”
Here’s the trick: there may be lots of things that we can do to help you address particular situations before you file bankruptcy. Do NOT worry about the consequences: just tell me the truth, and let’s figure out how best to proceed. If you have substantial assets that could be lost in Chapter 7, then maybe Chapter 13 is right for you.
Either way, you must list all of your assets and all of your debts in your bankruptcy petition. No one at my firm can tell you to avoid listing an asset, or a debt. If they do, you should go to another law firm. We are honest lawyers.
Paying Back Relatives: Many of my clients owe their relatives money and they try to pay them back just before they file bankruptcy so they do not have to include their relatives when they file. This is what we call a “preference.” The Bankruptcy Code gives the trustee special powers to avoid these preferences. If you repay a relative a substantial sum of money within one year before you file bankruptcy, the trustee may be able to obtain a court order to go get that money from your relative. Please consult with me before making any such payments.
Transferring, or “Giving Away” Valuable Property: If you give valuable property away for little, or no money just before filing bankruptcy, this may look fraudulent to the Bankruptcy Court. You could lose your bankruptcy discharge, or face criminal prosecution. You may be able to sell some items for fair market value, but this cannot be done fraudulently. Please see me before making any move like this. Our initial consultation is free: messing up your own bankruptcy could be very expensive for you!
Paying Off Large Debts: Some clients pay off large unsecured debts to their credit union, or their favorite credit card, just before they file bankruptcy. If you repay more than $600 to a general, unsecured creditor within 90 days before you file bankruptcy, and it is not your regular monthly payment, the trustee may have the authority to go to that creditor and recover the money. In that case, you may be defeating your goals.
If you want to keep an unsecured creditor happy, you may want to simply “reaffirm” with that creditor and sign an agreement in bankruptcy in which you agree to keep making payments after you file bankruptcy.
Destroying Business Records: If you are in business, the trustee may want to review your business records to determine that there are no assets to administer. If you destroy your business records, (s)he cannot determine this. You could lose the right to your discharge and face possible prosecution for “obstructing, hindering, or delaying” the trustee. PLEASE cooperate with the trustee! He, or she holds a lot of power.
Chapter 7 and Chapter 13 can stop garnishments!
If a creditor obtains a judgment against you, the creditor may garnish your wages. Federal law prohibits regular creditors from garnishing more than 25% of your wages. Illinois imposes a 15% limitation. Iowa has limitations depending on how much you make and there is an annual cap on how much can be taken. Child support may garnish more money.
Some creditors call and threaten to garnish your wages. They CANNOT garnish you until they SUE you! Student loan creditors are the exception. Yes, you are SUPPOSED to get notice of a garnishment. The moment it is served on your employer, the sheriff gives a second copy to your employer to give to you. You normally have 10 days to file a “Motion to Quash” the garnishment, if you have a reason to dispute the judgment. Unfortunately, some employers do not give the notice to their employers.
Automatic payroll deductions are voluntary and can be cancelled by you at any time by simply informing your payroll department.
Keep in mind that your bank account may also be garnished. There is no limit to how much money can be levied on from your bank account, but a creditor is not allowed to take social security monies from there.
Please call me, if you are facing threat of garnishment at (309)788-3799.
If a creditor sues you and obtains a judgment, there may be a lien on your house, or any other piece of real estate you may own. Liens on your house may be “stripped off” in bankruptcy.
Iowa: Judgments are automatically liens on all real estate in the county where the judgment is registered.
Illinois: Judgments must be registered at the Recorder of Deeds office to become liens on real estate.
Please be sure to tell us about any judgments entered against you. If you are unsure whether there is a judgment, be sure to tell us about all lawsuits against you, especially if the debt was never paid. Please call our offices at (309)788-3799 and let us help you to find out whether there is a judgment against your home!
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