Deciding whether to file for bankruptcy can be a difficult decision. Most people prefer to pay their debts and maintain a good credit rating. But sometimes, even with the best budgeting, finances can get quickly and unexpectedly out of hand. For Illinois or Missouri residents considering bankruptcy, a free evaluation by a knowledgeable bankruptcy attorney should be the first order of business.
Purpose Of Bankruptcy
Bankruptcy was created to provide relief for consumers with more debt than they can repay, and for whom less drastic options are not a solution. It offers the debtor a fresh start by completely eliminating debt or by creating a reasonable plan to repay a portion of the debt. Once a bankruptcy discharge is granted, the debtor is no longer liable for any of the discharged debts.
One disadvantage of filing for bankruptcy is that certain types of credit may not be available for as long as the bankruptcy appears on the credit report. This is usually for seven to ten years. However, for most people considering bankruptcy, the credit score is already in trouble and, after debts are discharged or repaid, there is an opportunity to rebuild financial stability and thereby to raise the credit score.
What Not to Do Before Filing for Bankruptcy
If you are concerned about the possibility of losing property in a bankruptcy, the worst thing you can do is to try to sell or give away that property to anyone – particularly a friend or relative. Under the federal bankruptcy code, the trustee has the power to void contracts made by the debtor within two years of the filing of a personal bankruptcy if fraud is suspected. Not only do you risk losing the asset involved, but a bankruptcy trustee could decide not to grant you a discharge. Criminal sanctions, including a fine or even jail time, are a possibility in some cases.
Your bankruptcy attorney will also explain how important it is not to make any unusual or unnecessary purchases or cash withdrawals with credit cards. The bankruptcy code presumes that any cash advance greater than $750 taken out within 70 days of filing for bankruptcy is fraudulent. In addition, any luxury purchase on a credit card within 90 days of the bankruptcy filing is also presumed to be fraudulent. Of course, it is possible that your bankruptcy attorney may be able to explain why the cash advance or luxury purchase should be allowed, but this is a situation all debtors should ignore at all costs. If the trustee decides a cash advance of purchase is not fraudulent, that debt is not discharged in the bankruptcy.
The general rule of thumb is not to make any charges or cash withdrawals you don’t intend to repay. Most importantly, put away your credit cards after visiting your bankruptcy attorney. Any charges made after deciding to file for bankruptcy will likely be viewed as a way around the bankruptcy code.
Chapter 7 And Chapter 13 Bankruptcies
There are two types of bankruptcy actions. The Chapter 7 bankruptcy can completely eliminate certain types of debt. A Chapter 13 bankruptcy provides a court-ordered repayment plan for a portion of the debt. Although these actions are quite different, the goal of both is to provide financial relief. A Chapter 7 bankruptcy action usually takes 4-6 months to complete. A Chapter 13 bankruptcy might take 3-5 years.
What Does a Chapter 7 Bankruptcy Do?
Chapter 7 bankruptcy can excuse all unsecured debt including medical bills, utility bills, credit card debt, personal loans and payday loans. It can also immediately stop creditors from calling and taking further action. A disadvantage of Chapter 7 is that the court might liquidate a debtor’s assets. Asset protection in a Chapter 7 proceeding depends on state-specific exemptions that govern equity in assets like a home, boat or automobile.
What Does a Chapter 13 Bankruptcy Do?
A Chapter 13 bankruptcy is designed to protect assets. For those in danger of losing equity in a home, vehicle or other secured asset, Chapter 13 can prevent foreclosure and/or repossession. The court can set up a manageable debt repayment plan involving one monthly payment to a court-appointed trustee and eliminate further collection action against the debtor.
Bankruptcy in Illinois
Bankruptcy comes under federal law. However, state statutes and judicial precedents can differ greatly between states. States determine bankruptcy exemptions that control which assets are protected under a Chapter 7 action. State statutes also determine the percentage of debt to be repaid under a Chapter 13 filing.
When to Consider Bankruptcy
The bottom line in any bankruptcy decision is the proportion of debt in relation to available income. That being said, here are some indications that consultation with a bankruptcy attorney would be a reasonable course of action:
- Wage garnishment
- Home foreclosure
- Vehicle about to be or already repossessed
- Suspension of driver’s license for unpaid tickets or for an uninsured/under-insured accident
Filing bankruptcy can prevent all these things from happening, even a court-ordered wage garnishment. It can also restore a repossessed vehicle, halt a foreclosure, and reinstate a driver’s license.
Other Reasons to Consider Bankruptcy
- Being unable to afford minimum credit card payments
- Being sued by a creditor
- Using cash advances to make credit card payments
- Having many dependents
- Threat of losing a business
- Utilities being turned off
- Regular payments not reducing debt
- Savings and assets are small in relation to debt
- Most debt is unsecured (credit cards, personal loans, payday loans, medical bills)
- Bank accounts frozen by creditors
- Debt due to job loss, separation, divorce or death of a breadwinner
- House and/or car payments in arrears
Another way to determine whether bankruptcy is appropriate is to figure monthly disposable income. Monthly disposable income is what remains from total income after all monthly bills have been paid. If disposable income is not enough to pay off debt over a reasonable amount of time (3-5 years), then bankruptcy might be the best solution.
For those who are experiencing any of the above symptoms, consultation with an Illinois bankruptcy attorney is free of charge. An experienced bankruptcy lawyer can explain all of the available options. It’s best to schedule a consultation before debt gets out of hand, but for those who are already in trouble, the time to call is now.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.