What Is Bankruptcy?
Bankruptcy is a legal proceeding in which person who is unable meet his or her financial obligations can get a fresh start by eliminating all or some of the debts. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law.
What Can Bankruptcy Do for Me?
Bankruptcy may make it possible for you to:
- Eliminate the legal obligation to pay most or all of your debts. This is called a “discharge” of debts. It is designed to give you a fresh financial start.
- Stop foreclosure on your house and allow you an opportunity to catch up on missed payments. Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property without payment.
- Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
- Stop wage garnishment, debt collection harassment, and similar creditor actions to collect a debt.
- Restore or prevent termination of utility service.
- Allow you to challenge the claims of creditors who have committed fraud or who are otherwise trying to collect more than you really owe.
Bankruptcy cannot, however, cure every financial problem. In bankruptcy, it is usually not possible to:
- Eliminate certain rights of “secured” creditors. A creditor is “secured” if it has filed a mortgage or other lien on property as collateral for a loan. Common examples are car loans and real estate mortgages. You can force secured creditors to take payments over time in the bankruptcy process and bankruptcy can eliminate your obligation to pay any additional money on the debt if you decide to give back the property. But you generally cannot keep secured property unless you continue to pay the debt. (Junior mortgages and other liens recorded against real property may be eliminated or “stripped” in Chapter 13 bankruptcy if they are not at all secured by the value of the underlying property; i.e. the aggregate of senior mortgages and liens is higher than the value of the property.)
- Discharge types of debts singled out by the bankruptcy law for special treatment, such as child support, alimony, most student loans, court restitution orders, criminal fines, and most taxes.
- Protect cosigners on your debts. When a relative or friend has co-signed a loan and the consumer discharges the loan in bankruptcy, the cosigner may still have to repay all or part of the loan.
- Discharge debts that arise after bankruptcy has been filed.
What Type of Bankruptcy Can I File?
There are two basic types of bankruptcy cases provided under the law for individuals:
- Chapter 7 bankruptcy is known as “straight” bankruptcy or “liquidation.” In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a Chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for “exempt” property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors.
- Chapter 13 bankruptcy is a type of “reorganization” used to pay all or a portion of the debts over a period of time using available current income. In a Chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property, like your home or your car, which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind.
Do I Have to File Bankruptcy with My Spouse?
No. Although married couples can file together, they only should file jointly if their debts are joint or if each spouse has a significant amount of individual debts. Just because one spouse is filing bankruptcy does not mean that the other spouse is required to do so. In most cases, the non-filing spouse’s credit will not reflect the bankruptcy filing of the other spouse.
What Property Can I Keep and Still File for Bankruptcy?
In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors. It is important to check the exemptions that are available in the state where you live. If you moved to your current state from a different state within two years of your bankruptcy filing, you may be required to use the exemptions from the state where you lived just before the two-year period. In some states, you are given a choice when you file bankruptcy between using either the state exemptions or using the federal bankruptcy exemptions.
The most common bankruptcy exemptions utilized in Illinois are:
- $4,000 general or wild card exemption usually used to exempt savings and household items
- $15,000 in equity in your home;
- $2,400 in equity in your car;
- $1,500 in assets you need for your job (tools, equipment, etc.);
- Unlimited exemptions apply to your right to receive certain benefits such as social security, unemployment compensation, veteran’s benefits, public assistance, and pensions.
The amounts of most exemptions are doubled when a married couple files together.
In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also only need to look at your equity in property.
While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases, you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.
Can I Keep My House and My Car and File for Bankruptcy?
In most cases you will not lose your home or car during your bankruptcy case as long as your equity in the property is fully exempt. Even if your property is not fully exempt, you will be able to keep it if you pay its non-exempt value to creditors in chapter 13.
However, some of your creditors may have a “security interest” in your home, your car or other personal property. This means that you gave that creditor a mortgage on the home or put your other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If you don’t make your payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.
In a chapter 13 case, you may be able to keep certain secured property by paying the value of the property rather than the full amount owed on the debt. Or you can use chapter 13 bankruptcy to catch up on back payments and get current on the loan.
There are also several ways that you can keep collateral or mortgaged property after you file a chapter 7 bankruptcy. You can agree to keep making your payments on the debt until it is paid in full. Such reaffirmation agreement entered between you and the creditor has to be approved by the Bankruptcy Court. Or you can pay the creditor the amount that the property you want to keep is worth. In some cases, involving fraud or other improper conduct by the creditor, you may be able to challenge the debt. If you put up your household goods as collateral for a loan (other than a loan to purchase the goods), you can usually keep your property without making any more payments on that debt.
Will Bankruptcy Wipe Out All of My Debts?
Yes, with the exception of:
- money owed for child support or alimony;
- most fines and penalties owed to government agencies;
- most taxes and debts incurred to pay taxes which cannot be discharged;
- student loans unless you can prove to the court that repaying them will be an “undue hardship;”
- debts not listed on your bankruptcy petition;
- loans you obtained by knowingly giving false information to a creditor, who reasonably relied on it in making you the loan;
- debts resulting from “willful and malicious” harm;
- debts resulting from driving while intoxicated;
- mortgages and other liens which are not paid in the bankruptcy case (but bankruptcy will wipe out your obligation to pay any additional money if the property is sold by the creditor).
Can I Eliminate My Income Taxes in Bankruptcy?
Generally, all personal income taxes that are timely and properly filed for periods more than 3 years preceding the bankruptcy filing can be discharged. Income tax returns must have been filed on or before the original due date and no audits could have subsequently occurred. If an audit was conducted, 2 years must pass from the new determination for the income taxes to be dischargeable.
Will Bankruptcy Affect My Credit?
It may. However, if you are already behind on your bills, your credit reflects it and your credit rating is not good. Bankruptcy will probably not make things much worse.
The fact that you’ve filed a bankruptcy can appear on your credit record for ten (10) years from the date your case was filed. But because bankruptcy wipes out your old debts, you are likely to be in a better position to pay your current bills and you may be able to get new credit.
If filed for bankruptcy, remember that debts discharged in your bankruptcy should be listed on your report as having a zero balance, meaning you do not owe anything on the debt. Debts incorrectly reported as having a balance owed will negatively affect your credit score and make it more difficult or costly to get credit. You should check your credit report after your bankruptcy discharge and file a dispute with credit reporting agencies if this information is not correct. See Rebuilding Credit After Bankruptcy for more information.
Can I File for Bankruptcy If I Am a Licensed Professional?
Yes. All individuals are entitled to bankruptcy relief. In most cases, professional licenses carried by certified public accountants, realtors / real estate brokers, medical doctors or attorneys are not affected by bankruptcy filing. However, individuals who are licensed to give financial advice, such as series 7 licensees, may be denied license renewal.
Can I File for Bankruptcy If I Am Not a U.S. Citizen?
Yes. The Bankruptcy Code does not require a proof of citizenship or a proof of permanent residency for individuals seeking bankruptcy relief. So even immigrants without a green card can potentially file for bankruptcy. However, individuals filing for bankruptcy must have a valid ID and a valid social security card.
Can I File for Bankruptcy More Than Once?
Yes. You can file chapter 7 bankruptcy every 8 years. If 8 years have not passed since you last filed for a Chapter 7 bankruptcy, you may be able to file chapter 13 bankruptcy. If you filed chapter 13 bankruptcy previously and obtained a discharge, you must wait 6 years to file chapter 7 bankruptcy. If you filed chapter 13 bankruptcy previously and it was dismissed, you may file another chapter 13 bankruptcy if you can show a change in your circumstances since the prior filing.