Analyzing benefits and risks of filing Chapter 7 bankruptcy

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1 Analyzing benefits and risks of filing Chapter 7 bankruptcy Successful bankruptcy provides a fresh start for the honest but unfortunate debtor Chapter 7 discharge is only available once every 8 years. Immediate and long term costs Alternatives to Chapter 7 bankruptcy must be discussed with debtor 1

2 Costs of filing Chapter 7 Filing fee of $335, can be waived for most CVLS clients Bankruptcy is a public record, is available on Internet. Full financial disclosure required Bankruptcy stays on credit record for 10 years, cf. 7 years for delinquent debts 2

3 Opportunity cost of filing bankruptcy Option of filing Chapter 7 is a form of insurance. Can t file again for 8 years. What financial risks does debtor face? Does debtor have health and auto insurance Bankruptcy doesn t cure a negative budget This may be an opportunity for debtor to address budget issues 3

4 Risks of filing Chapter 7 No unconditional right to dismiss if things are going badly Chapter 7 trustee and US Trustee examine debtor s finances If undisclosed assets are found, trustee can sell them AND debtor denied discharge Preferential payments, fraudulent transfer and gifts can be recovered by trustee Denial of discharge means existing debts can never be discharged in Chapter 7 Criminal prosecution for false oath or hindering case 4

5 Alternatives to Chapter 7 Doing nothing State law limits on garnishment of income and seizure of property Fair debt collection practices act limits collection activity by debt collectors Chapter 13 (reorganization for individual) Debt repayment arrangements Litigation with troublesome creditor 5

6 Illinois exemptions 735 ILCS 5/ & Necessary clothing Child support reasonably necessary In practice, 100% Retirement plans or accounts unlimited Social security & public assistance Includes earned income credit Principal residence owned in tenancy by the entireties is exempt from unsecured debts owed only by one spouse Except child support owed to former spouse? 6

7 Illinois Exemptions 735 ILCS 5/ & 5/ Homestead - $15,000 one; $30,000 two or more Wild card any personal property - $4,000 One motor vehicle - $2,400 Can stack unused wild card onto motor vehicle exemption 7

8 Income that is protected Social security, unemployment, workers compensation, child support, pensions Non cash benefits such as food stamps Earnings less than 45 times Illinois minimum wage But, federal government and out of state garnishment limits are 30 times federal minimum wage 8

9 Benefits of Chapter 7 Bankruptcy Purpose - fresh start for the honest but unfortunate debtor Who can t afford to pay debts see means test Discharge of debts at the end of the case Automatic stay while case is pending No discrimination based on failure to pay dischargeable debt 9

10 Specific benefits Wage garnishment stops when case is filed Stopes collection activities by original creditors as well as debt collectors Debtor can keep or restore utility service Must pay deposit, but don t have to pay debt Non discrimination Driver s license can t be suspended for failure to pay for accident 10

11 Bankruptcy is for Creditors Too Promotes fairness among creditors Equal treatment of similarly situated creditors Discourages race to the court house 11

12 Key concepts Discharge of personal liability for debts Injunction against collection of debts Some debts may not be discharged Property of the bankruptcy estate Broad definition all property rights & interests Debtor can keep exempt property Automatic Stay Protects debtor Protects property of the estate 12

13 Property of the estate All legal or equitable interests of the debtor Wherever located and by whomever held Whether listed on bankruptcy schedules or not Equitable vs. legal interest If debtor has equitable interest but not legal title, this is property of the estate Exception does not include defined benefit pensions and spendthrift trusts 13

14 Exempt property Debtor keeps exempt property Property must be listed and claimed as exempt Illinois has opted out of federal exemptions Debtor can claim Illinois exemptions Non bankruptcy federal exemptions 14

15 Exemption issues Limits on exemptions Will not stop mortgage foreclosure Purchase money security interests Debts for child support or alimony Non purchase money security interests Can avoid liens on household goods, tools of the trade Special rules if lived out-of-state in last 2 years 15

16 Discharge of debts Purpose fresh start for debtor Discharge is injunction against collection attempts Remedy for violation is contempt Can only get Chapter 7 discharges once every 8 years; Chapter 13 discussed later Doesn t cover post-petition debts Must complete debtor education 16

17 Utility service Discharge Fresh start Cannot be denied because of dischargeable debt Must pay deposit but not old bill If stolen service, Chapter 13 Drivers license Restored if suspended for nonpayment of tort debt No discrimination by governmental units or employers 17

18 Discharge Exceptions to discharge Some debts are never discharged Creditor can collect once automatic stay ends, does not need express permission from court Debts which are discharged unless creditor takes timely action in bankruptcy court Student loans are only discharged if debtor proves undue hardship in bankruptcy court Alternatives loan consolidation, deferrals 18

19 Discharge Debts that are never discharged Child support and alimony Criminal fines and restitution orders Drunk driving resulting in personal injury Trust fund taxes 19

20 Income taxes Discharge Debts that may be discharged ~ > 3 years, 3 months & 15 days old, return filed Debts where creditor fails to timely object Fraud Theft, embezzlement, breach of fiduciary duty Willful and malicious injury 20

21 Discharge Chapter 13 - enhanced discharge Successful Chapter 13 discharges a few debts which would not be discharged in Chapter 7 Civil fines Debts incurred to pay taxes Property settlements and division of debts arising out of divorce 21

22 Discharge and secured debt Only personal liability is discharged Personal liability on a debt is discharged Non filing co-obligors are still liable But valid liens on property survive Debtor not liable for any deficiency after repossession or foreclosure 22

23 Serial filings waiting periods for getting another discharge Filing a Chapter 7 now, must wait 8 years since previous Chapter 7 6 years since previous Chapter 13 Previous Chapter 13 with % payment Filing Chapter 13 now, no discharge if Chapter 7 within 4 years Chapter 13 within 2 years Measured from filing date to filing date 23

24 Automatic Stay Automatic nature Filing petition invokes stay Exception if this is 3 rd case pending during last 12 months No court order is necessary Actions in violation of stay are void 24

25 Automatic Stay Broad scope Applies to acts against debtor Lawsuits & other action to collect debts Applies if debt nondischargeable unless DSO Applies to acts against property to recover property for pre-petition debts to recover property of bankruptcy estate 25

26 Automatic Stay Notable exceptions Criminal and regulatory Domestic relations (almost everything) Establishing paternity Establishing or modifying alimony or support Collecting alimony or child support Stay does apply to division of property Post-petition debts 26

27 Repeat filings Limits on automatic stay If case filed within 1 year after previous case dismissed, stay expires after 30 days Stay can be extended by court. Motion must be filed and granted within 30 days. Must show clear and convincing evidence of changed circumstances. Stay may still apply to property of the estate If 2 dismissals in previous year, no automatic stay Must file motion to impose stay 27

28 Automatic Stay Expiration When discharge granted (or denied) When case dismissed or closed 28

29 Sources of law jurisdiction, venue & substance Jurisdiction & venue in Title 28, U.S. Code Judiciary & Judicial Procedure Substance - Bankruptcy Code, Title 11 means test use IRS collection standards and Census Bureau statistics Property rights based on state law and nonbankruptcy federal law 29

30 Sources of law - procedure Procedure Bankruptcy Rules Incorporates some sections of Federal Rules of Civil Procedure Bankruptcy code has some procedural rules Administrative office of US Courts N.D. Illinois local rules & general orders mandatory electronic case filing (ECF) Individual judges standing orders Web site judges tab 30

31 Bankruptcy players Case Trustee Chapter 7 panel trustee Chapter 13 standing trustee United States Trustee ************* Auditors United States Attorney 31

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