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

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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

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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

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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

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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 creditor5

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Illinois exemptions735 ILCS 5/12-1001 & 12-1006

• 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?

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Illinois Exemptions735 ILCS 5/12-901 & 5/12-1001

• 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

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

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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

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 accident10

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Bankruptcy is for Creditors Too

• Promotes fairness among creditors

• Equal treatment of similarly situated

creditors

• Discourages race to the court house

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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

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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

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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

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Exemption issuesLimits 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

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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

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DischargeFresh start

• Utility service

– 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

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DischargeExceptions 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

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DischargeDebts that are never discharged

• Child support and alimony

• Criminal fines and restitution orders

• Drunk driving resulting in personal injury

• Trust fund taxes

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DischargeDebts that may be discharged

• Income taxes

~ > 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

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DischargeChapter 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

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Discharge and secured debtOnly 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

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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 70-100% 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

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Automatic StayAutomatic nature

• Filing petition invokes stay

– Exception if this is 3rd case pending during last

12 months

• No court order is necessary

• Actions in violation of stay are void

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Automatic StayBroad 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

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Automatic StayNotable 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

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Repeat filingsLimits 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

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Automatic StayExpiration

• When discharge granted (or denied)

• When case dismissed or closed

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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

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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 www.ilnb.uscourts.gov – “judges” tab

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Bankruptcy players

• Case Trustee

– Chapter 7 – panel trustee

– Chapter 13 – standing trustee

• United States Trustee

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• Auditors

• United States Attorney

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