Analyzing benefits and risks of filing Chapter 7...
Transcript of Analyzing benefits and risks of filing Chapter 7...
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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