Larry Lauterjung Law | Marion, IL
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Lauterjung Law Office, Marion

Bankruptcy


Don’t wait! Don’t delay filing until the very last minute.

Few clients ever regret filing, but most regret waiting too long and filing too late.

The longer you wait, the more you will pay unsecured creditors (like credit card companies, or doctors, etc.). In most circumstances unsecured creditors receive little or no payment through a bankruptcy.

Many clients make maybe years of minimal payments to satisfy interest charges on credit cards, and make no progress toward paying off the obligation, then they file bankruptcy and conclude that those years of interest payments were unnecessary, wasted payments.

If you worry that someday you may have to file bankruptcy, come see me, or any bankruptcy lawyer, to find out what your options are, and what is your best strategy, -- even if you decide not to file now, or ever!

Come see me as soon as you start having financial troubles, the consultation is free, and you might be able to avoid costly mistakes.


Chapter 7 Bankruptcy


"At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the LORD's release" (Deuteronomy 15:1-2).

Pretty strong support for the basic principle of bankruptcy. Under our current bankruptcy law one can file Chapter 7 every eight years. Chapter 7 is the quickest, easiest, and cheapest bankruptcy that is the best, unless you don’t qualify, or prefer Chapter 13.


EXEMPTIONS

Chapter 7 bankruptcy is the method by which American law permits debtors to liquidate (sell and convert into cash) their estates (everything they own) and use the funds to pay unsecured creditors. But the states and the federal government provide laws called exemptions that are used to protect property of the debtors that does not have to be liquidated. In Illinois, a married couple can keep $30,000 worth of a home; $4,800 worth of two cars; pensions, $3,000 worth of tools of the trade (if both husband and wife are involved in trades), all clothes, Bibles, school books and family pictures; and $8,000 worth of everything else (except real estate, this exemption is known as the wildcard, because it covers almost anything). If you are an individual filing, divide the above numbers in half.

But you say, my house is worth $50,000 so I guess I’ll have to lose it. Here is where you must understand the meaning of equity. Equity is the portion of you interest in a piece of property that you own – and most people share ownership of their house with a bank. So if you have a mortgage that you owe $30,000 on for that $50,000 house, take its value, $50,000, subtract the value that you do not own because of the loan (here it is $30,000), and the remaining figure is $20,000. You do not own a $50,000 home, you have equity of $20,000 in that home – you own $20,000 of that home. The exemption for a house for a married couple is $30,000, so your home is protected by the exemption, and you do not have to give it up in a Chapter 7.

But what happens to the home? Nothing, it is not affected by the bankruptcy, because the debt you own it is secured. The debtor, or the mortgagor, has filed papers that legally establish his interest in the property to the extent of the remaining amount you owe on the home. The mortgage is untouched by the bankruptcy as long as you keep the bank happy and continue to make your payments. And the same reasoning applies to cars that are secured by a loan. If you are filing Chapter 7, and want to keep your cars and house, if they are financed by secured loans, keep the bank happy or you can lose them – not because of the bankruptcy, but because you have violated the terms of the financing contract.

The average person filing bankruptcy keeps everything she owns. Most debtors have been diligently paying their bills all their lives but because of a failing business, medical bills, out of control credit card debts, or a divorce; they get in a bind and can no longer pay their bills. As long as all the stuff they own is protected by the exemptions, they keep everything – and most people do.


SECURED VERSUS UNSECURED DEBT

What about the home or car you can no longer afford to keep? Can bankruptcy help you get rid of the legal obligation to pay those debts? Secured debts are loans on usually cars and houses that have been recorded with the government on the title to the item. Unsecured loans are not recorded. They are debts for which there is no property to place a lien on (a lien is the governmental record of shared ownership of an item because of a debt). Unsecured debts are usually credit cards and medical bills. If the credit card company tried to put a lien on every transaction they were involved in, they would not be able to offer their services at competitive rates, or their competitors would offer the same services without requiring you to agree to a lien (as they virtually all do now). When you file Chapter 7, all your unsecured debts are eliminated, and you owe nothing – unless… If your exemptions do not cover all your property, any property that is not protected by an exemption, will be sold by the court, and the money will be used to pay a portion of your debt to the unsecured creditors – if they file the appropriate paperwork.

What does all this have to do with that house or car you can’t afford? When you bought the house or car, because of the mortgage or lien, it was a secured debt. So how can you convert a secured debt into an unsecured debt in bankruptcy so the debt is discharged? Surrender it. Once the collateral is surrendered, the secured debt becomes unsecured, and it is discharged like any other medical bill or credit card, but remember – to convert a secured debt to an unsecured debt, you must surrender the collateral to the lien holder.


NON-EXEMPT PROPERTY

Suppose all this sounds fine, but your husband refuses to file bankruptcy unless he gets to keep his Harley.

You have totaled up all your property, and it is all protected by exemptions, except for the Harley, it is worth $5,000.

You have used all the wildcard to cover your Hummel figurine collection, household furniture, and appliances, and there is $2,000 worth of non-exempt equity in the Harley (value that is not owned by a lien holder, and not covered by an exemption). Like mentioned before, non-exempt property becomes the property of the court, and they sell it to distribute among the unsecured creditors.

But there is still hope to keep the Harley. If you surrender it, the Judge’s assistant, the trustee, will have to take it to a storage yard, pay storage fees, then take it to an auction, or sell it to a used motorcycle dealer for wholesale value or less. She would much rather not take all that risk, and just let you pay a reasonable amount and avoid all the middlemen and additional costs. You can offer maybe $1,500 cash and she may be glad to let you keep it. Some trustees will even give you time to make payments (usually no more than six months). People in such situations usually use money loaned to them by relatives or friends to make this sort of deal, but if you are filing bankruptcy, do nothing about such a transaction until talking to your lawyer.


COURT
you file a Chapter 7, will you have to go to court? If you have told the truth, and have presented the court with no questionable information, you will probably not go to court. Probably less than 5% of Chapter 7’s actually go before a judge, and often the client does not even have to appear on them. The judge is too busy deciding legal issues to deal with the dollars and cents, and routine aspects of a bankruptcy. He has an assistant who is known as a trustee to be sure the bankruptcy petition is in order, so cases do not have to go to court.

You will have to attend what is known as the “341 Meeting of the Creditors.” And again probably 90% of these 341 meetings (as they are called by the lawyers because the creditors virtually never attend) are only between you, your lawyer, and the trustee. The meeting is not held in a courtroom, it is not before someone wearing a robe, there is no court reporter, and it usually lasts about ten minutes. It is your lawyer’s job to present your case in the manner that is in your best interests, within the bounds of the law. Sometimes the trustee will disagree with information in your bankruptcy petition, and the 341 meeting is the chance for everyone to get on the same page, and agree as to the contents of the final bankruptcy petition to be approved by the court.

Even though there will be no court reporter at the 341, the meeting will be recorded. If you lie, and it can be proven in court, you could go to jail. You will be asked no questions you do not know the answer to, but don’t talk too much. Only answer direct questions with direct answers, and if you are not sure how to answer, your lawyer will be sitting by your side.


WHEN IS IT ALL OVER?

After your petition is filed, it takes about two months before you have your 341 hearing, and about a month after that before the trustee makes an order to discharge all your debts. But even then the case remains open for the trustee to distribute any non-exempt equity (property or money not protected by exemptions) for a month or two. We usually tell clients that a chapter 7 bankruptcy is closed six months after filing.

So what about your credit rating? By the time you are ready to file a bankruptcy, because of the financial problems you have been going through, and the late bill payments, and the threats to take you to court, and the debt collection lawsuits – your credit rating is already pretty bad. The bankruptcy should end any new bad marks on your credit rating, and give you a chance to start increasing your score. The bankruptcy can remain on your credit rating for ten years, but that does not mean you cannot get loans. Many people think that if your credit rating is too low, that the law keeps them from being eligible for credit – that is not true. Shortly after closing your bankruptcy, you will probably get offers for credit cards. Any creditor who believes you are worth the risk, or that you have the collateral – can and will be glad to give you credit – at the interest rate of his choice. If you need credit (like to buy a car) after your bankruptcy, shop around, and look for the best deal.

And that brings us back to where we started: you can only file chapter 7, once every eight years, but you can file a chapter 13 sooner than that. If you have any questions, feel free to give me a call.


Chapter 13 Bankruptcy


I always begin my explanation of Chapter 13 by pointing out that Chapter 7 is a legal right. As long as you follow the rules, have not been barred by a court from filing, and have not filed in the last 8 years, you can file a Chapter 7 and get a discharge. Chapter 13 is not a right – it is a privilege – you must be able to afford a Chapter 13. You must have regular income sufficient to pay for the Chapter 13 according to the requirements of the law

In a Chapter 13, your case is open for three to five years while you make regular payments to the Chapter 13 trustee. You will pay for your house (if you choose to keep it), any arrearage on the house, for cars (that you decide to keep), your attorney fees, the trustee fees, and possibly some of your debt to unsecured creditors. This is a simplified version of a Chapter 13 Plan (the contract you make with the Chapter 13 trustee to pay creditors according to bankruptcy law). Miss a payment and the trustee can close the case, and you will be back where you started before filing. All creditors will be due what you owed before, any interest that would have accrued if you had not filed your bankruptcy will be reinstated, and they have the right to repossess financed secured property (cars, homes, motorcycles, boats) if you do not repay the creditor all the money you didn’t pay during the Chapter 13. Make a payment a few days late or miss one or two payments over several years, and your case might not be dismissed – but it can be!


WHY FILE A 13?

There are two predominant reasons why people file Chapter 13. The first is that they make too much money to file a Chapter 7. Remember that you can file the Chapter 7 if you want, it is a legal right. But you don’t want to, if you will lose that Harley, or if you have to come up with $20,000 to protect non-exempt equity (stuff not protected by exemptions, see the Chapter 7 article) within a few months of filing. Chapter 13 allows people in those situations to structure a Plan that will give them three to five years to pay what is necessary to keep their belongings.


STOP FORECLOSURES AND REPOSSESSIONS

The other reason most people file a Chapter 13 is to stop a foreclosure or repossession. The filing of a 13 will stop state court foreclosure and repo proceedings dead in their tracks (remember that a bankruptcy is a case filed in a federal court). The foreclosure is stopped to give you time to work out the details of your Plan in which you must agree to pay the normal monthly amount for your house payment, and an amount for your car payment, each month of the plan, and pay an equal portion of the arrearage (the amount you owe the mortgage or lien holder because of missed past payments). Chapter 13 is no miracle. You will still have to pay for the house or car – if you want to keep it – but you are given up to 60 months to pay for the amount you have fallen behind. The cold dilemma about Chapter 13 is that many people, who can’t afford to keep making their house payments, must realize that in the 13 they must continue to make the house payments, plus a proportionate share of the arrearage to keep the house. They ask me, “If I can’t make my house payments now, how can I make house payment and arrearage payments in the future!” That’s a good question, and hits at the essence of a Chapter 13. It is for people who have gone through some temporary financial tragedy, that has passed, or will soon pass, and those who want time to catch up to pay creditors who are trying to foreclose mortgages, repossess vehicles, or garnish paychecks. Yes, Chapter 13 will stop garnishments!

If you are about to lose your car through repossession, the Chapter 13 can stop the repo, and under ideal circumstances, you may pay less for your car through the Plan than you are obligated to pay under your financing contract. If you bought your car within 910 of filing the Chapter 13 you will pay for it at the contractual value, but the interest rate may be reduced under certain circumstances. If you have been paying for your car for more than 910 days, you will only be obligated to pay its current value at probably a much lower interest rate. If the car has been repoed, you may be able to get it returned if you file within 21 days of the repossession. But putting together a Chapter 13 Plan can take weeks, so if you’re going to file, do so BEFORE the car is repossessed.


STOP CREDIT CARD INTEREST AND CALLS

If you make so much money that the trustee will require you to pay all your creditors all the money you owe them, there is still an advantage to filing a Chapter 13. As of the date of filing, the unsecured creditors will stop charging you any new interest, and they will have to quit trying to collect from you (those annoying phone calls will stop). You will still pay all you owe those creditors as of the date you file, but no more.

In the normal Chapter 13, you pay all those bills that trouble you: house, car, maybe some of the credit cards, to the trustee in one monthly payment. No longer will creditors paid through the bankruptcy be able to argue with you about how much you owe, when payments were made, and whether you are behind. You will have a Federal Officer of the Court (the trustee) to answer those questions on your behalf for all creditors in the Plan.


PLAN PAYMENTS

Normally the Plan payments are deducted in equal installments from your paycheck. In other words, if you owe the trustee $1,000 per month, it will be paid in one $1,000 payment from your employer if you are paid monthly, if you are paid bi-weekly, each paycheck would include a $461 payment to the trustee, if you are paid twice a month, each check would have $500 deducted, and if you are paid weekly, your share to the trustee would be $231 per week.


LESS MONEY UP FRONT

If you are in a real financial bind, are eligible for a Chapter 7, but can’t afford to come up with the filing fee and attorney’s fees right now – and you need to file right now – Chapter 13 has an advantage. To file a Chapter 13, you only need pay the filing fee, which is $281, and most attorneys want aa few dollars in advance to file the case. So instead of magically producing over a thousand dollars to file a Chapter 7, you can pay a few dollars toward attorney fees, and then pay the remaining attorney fees over time through the Plan.


CREDIT REPORTING AGENCIES

Usually credit reporting agencies are more kind to you if you file a Chapter 13 than a Chapter 7. Most people filing a Chapter 13 are agreeing to keep financial obligations that they would have surrendered in a Chapter 7 – property that they would pay nothing for if surrendered. In the 13, they might keep the house or car they otherwise could not afford, would make regular payments to the trustee for three to five years, and establish a record of regular payments that should look attractive to prospective loan providers.


YOU CAN FILE A 13 BEFORE A PREVIOUS 7

Even if you have filed a Chapter 7 in the last eight years, you can still file a Chapter 13 – under certain circumstances. Talk to a lawyer for the details. If you have mortgages that exceed the value of your house, and another mortgage after that, the last mortgage that is attached to no value in your personal residence, can be eliminated in a Chapter 13 – talk to a lawyer for details. Some divorce marital settlement agreements can be discharged in a Chapter 13 – talk to a lawyer.


WHAT’S BEEN LEFT OUT

There are so many issues that can arise in a Chapter 13 that there is no way that I can explain all the details and possible problems in a few pages. Most attorneys are willing to file Chapter 7’s because they usually involve fewer problems than filing Chapter 13’s. When the new bankruptcy law was written a few years ago, Chapter 13’s were made so complex that many lawyers will not even try to file one. I have not presented all you need to know to file a Chapter 13 in this article, but have provided you a general overview of the process to distinguish filing a Chapter 7 from a Chapter 13. If you have questions, feel free to give me a call.

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