5 Things to Consider Before Filing for Bankruptcy

1. How did I get into this mess?

People considering bankruptcy are dealing with an unmanageable amount of debt. Although a bankruptcy may eliminate the debt, it’s important to understand the reason or reasons for the debt to avoid repeating the same problems in the future. Was the debt a result of a job loss, divorce, vehicle repossession, mortgage foreclosure, a failed business, student loans, overuse of credit cards, high-interest loans, gambling or catastrophic medical bills? Had the financial stress boiled over as a result of an eviction, sheriff’s sale, garnishment or seizure of assets? Some of these problems are beyond your control – others may be avoided with better financial management skills. The mandatory credit counseling and personal financial management classes, required of all individuals filing a bankruptcy case, help debtors develop these skills for starting over after bankruptcy.

2. How will bankruptcy help me?

The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. A Chapter 7 case leads to a Discharge of Debtor, which legally forgives many types of debts, such as medical bills, credit cards, utilities, unsecured loans and some court judgments. Chapter 7 does not discharge debts for recent tax liability, alimony, child support, injury claims from intoxicated driving accidents, fines and court costs, court-ordered restitution, unpaid tolls and most student loans. A Chapter 13 case involves a monthly repayment plan, usually ranging from 3 to 5 years. A Chapter 13 may allow a debtor to save his or her home from foreclosure, keep their assets and repay only a portion of their debt, and obtain a Discharge of Debtor as to the remaining debts at the end of the case.

3. Are there strings attached to a Discharge?

Yes. Illinois law provides limited exemptions that safeguard some of the debtor’s assets from claims of creditors. These include $15,000 of equity in a residence, $4,000 of personal property, $2,400 of equity in a vehicle, 100% of retirement funds, $1,500 in tools of the trade and $15,000 of a personal injury recovery, among other exemptions. These exemption amounts may be doubled when a married couple files jointly. If a Bankruptcy Trustee (the attorney who reviews the case and conducts a meeting of creditors) determines that the debtor(s) own property exceeding the exemption limits, that excess property can be seized by the Trustee and sold to pay creditors.

4. What happens after a Discharge is granted?

A Discharge of Debtor(s) legally forgives many types of debt but not all debts. The debtor may continue to be responsible for child support, alimony, tax liability determined within 3 years of filing, and student loans, among other non-dischargeable debts. In addition, a creditor may have filed a Complaint or Objection to discharge on the grounds of fraud, embezzlement or willful and malicious injury, and the Court may have determined that these debts are non-dischargeable. A record of the discharge will show up on the debtor’s credit report for up to 10 years. However, the debtor doesn’t have to wait that long to get credit. In fact, many credit card companies and car dealers will swamp the debtor with offers of credit, often at high interest rates, knowing that the debtor is unable to obtain another discharge for 8 years. So, debtors are cautioned not to get overextended as they can easily find themselves in trouble again.

5. What if I don’t do anything?

In 30-some years of practice, I have not met anyone who wants to file a bankruptcy. If they had the money to pay their bills, they would gladly do so. My clients file bankruptcy because they have to or because it makes the most financial sense. If someone stops paying their bills, creditors will typically inundate the debtor with phone calls and demand letters. That may be followed by contacts from lawyers, and eventually, lawsuits. Lawsuits, served by a Sheriff or Private Process Server, often lead to Judgments, which can be collected through wage garnishments, bank account garnishments and property seizures. If the debtor offers a partial payment in settlement, the creditor may accept the settlement and then issue a Form 1099 for the forgiven portion of the debt, which becomes taxable as income. No such income tax liability follows a bankruptcy discharge.

BONUS QUESTION:

Do you have a good bankruptcy lawyer?

Greg Martucci is a good bankruptcy lawyer with over 30 years of experience who has personally handled over 1200 cases. He will counsel you about the bankruptcy options available to individuals and businesses under the Bankruptcy Code, and in particular, how the bankruptcy laws can help YOU.

Stop creditor harassment. Get a fresh start. Call the Martucci Law Office at 630-980-8333 to schedule your FREE initial office consultation.