Bankruptcy

By Jonathan E. Shimberg and Linda R. Crohn

Bankruptcy for individuals and businesses involve three different chapters in the United States Statutes. Bankruptcy for farmers, municipalities, stock brokers and Chapter 11 will not be discussed in this pamphlet. Chapter 7 is a liquidation of debtors assets and a discharge of debts. Chapter 13 is a consolidation and repayment of debts.

CREDITORS

There are generally three types of creditors that are involved in bankruptcy. Priority creditors include the Internal Revenue Service or governmental taxing bodies. These types of debts are generally not dischargeable in any bankruptcy, although there are some exceptions. Secured Creditors are ones who have kept a security interest in the goods or property purchased.

A car loan is an example of a secured creditor. If car payments are not made, the car can be repossessed. Some stores that extend credit keep a security interest in appliances or furniture purchased with their credit card. Finally, Unsecured Creditors are ones where there is no security interest in the items purchased. Purchases made with a Visa, Master Card, personal loans, doctor or hospital bills are generally unsecured debt. If the debt is not paid, the creditor can not repossess the goods.

CHAPTER 7

A Chapter 7 is a liquidation and results in a discharge of debts. Once a Court has granted the discharge, the debtor no longer has to pay back any of his/her Secured or Unsecured debts. In most cases, taxes owed to the government are not dischargeable in a bankruptcy. There are other types of debts that are not dischargeable in a Chapter 7 Bankruptcy. They include such debts as alimony, child support, fraud, liability from accidents occurring while under the influence of intoxicating beverages or drugs, school loans (less than 7 years old). Arrangements need to be made to pay these types of debts even if a bankruptcy is filed.

A debtor has a choice when considering secured debt. One is to return the merchandise and discharge the debt. The other is to reaffirm the debt and pay the creditor in one lump sum or monthly installments (with interest) and keep the property. If a debtor is not represented by an attorney the judge must approve the reaffirmation agreement as to its fairness of the payment, the need of the item and the debtor's ability to repay.

EXEMPTIONS

A debtor is allowed to keep some assets, both real estate and personal property in order to start over. Some Illinois exemptions are as follows:

Individuals

• Real Estate = $7500
• Automobile = $1200
• Personal items - (bank accounts, cash, furniture, books, stocks, bonds, sports equipment, jewelry) etc. = $2000
• Clothes - up to what is necessary
• Professional tools = $ 750
• Retirement accounts - Entire amount

If the debtor has assets above the exemptions the trustee has the right to sell such assets and pay back creditors on a pro rata basis.

CHAPTER 13

Chapter 13 is for people with regular income. The debtor must show proof of the regular monthly income to use this type of bankruptcy. The debtor must be able to show that he/she has extra money at the end of each month to repay creditors. The debtor must also show that the debt can be paid off within 60 months. In this plan the debtor consolidates all of his/her debts into one monthly payment to a trustee. The trustee then pays the creditors based upon their claim and their status.

Again, a priority creditor must be paid in full. Secured creditors must be paid in full to the extent of the value of the goods. Unsecured creditors may be paid anywhere from 10% to 100%. The percentage is based upon what they would receive if the debtor's assets were liquidated.

Chapter 13 works well for debtors who have equity in the homes, equity in a car, savings accounts or other valuable assets. These assets remain in the debtor's possession until the Chapter 13 plan has been completed. While the debtor is making payments, these assets cannot be touched by creditors.

Some debts which are not dischargeable in a Chapter 7 bankruptcy may be put through a Chapter 13 plan. Some debts may be paid at less than 100% in a Chapter 13 plan.

AUTOMATIC STAY

In all Bankruptcy cases an Automatic Stay goes into effect upon the filing of the petition. This stops creditors from telephoning, sending letters, repossessing property or harassing a debtor to collecting the monies owed. It also stops wage garnishments and law suits. Any attempt to proceed to collect a debt could result in a creditor being held in contempt of court.

DISCHARGE

At the end of the case, a debtor is granted a discharge. The effect of the discharge is to free debtor from his debts. A creditor cannot come back later on and try to collect his debts.

IN CLOSING

A bankruptcy (Chapter 7) can be filed only once every six years. A Chapter 13 can be filed more frequently, but good faith in filing needs to be shown and often times will require the plan to consist of 100% payments to all creditors. Bankruptcy stays on your credit record for 7 years - 10 years.

This pamphlet is for informational purposes only. You should consult with an attorney regarding your specific situation

©1997 SHIMBERG and CROHN

jonshim@aol.com