Am I Eligible to File a Chapter 7 Bankruptcy?

Means testFederal bankruptcy law changed on October 17, 2005, and made certain higher-income individuals ineligible to file a Chapter 7 bankruptcy, forcing them into a Chapter 13.  The income threshold is based on the median family income, by household size, for the geographic region in which you currently reside.

The following Table contains the income threshold amounts, based upon family size for the State of Illinois, as of the most recent update on November 1, 2014:

  FAMILY SIZE
STATE 1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *
Illinois $47,469 $61,443 $72,342 $83,546

* Add $8,100 for each individual in excess of 4.

These numbers change frequently (often several times per year), based upon new census data, so for the most up-to-date figures please be sure to check:  www.justice.gov/ust/eo/bapcpa/meanstesting.htm.

How is this calculation completed: Although the figures above are expressed as an annual amount, this is not how the calculation is actually done.  You cannot simply compare the amounts shown on your tax returns to determine if you are over or under the threshold figure.  The calculation is actually based upon the average of ALL of your (and your spouse’s and other household member’s) gross income over the six months prior to the filing of your bankruptcy case.  This includes nearly ALL income received during this 6-month time period, including but not limited to wages (including all bonuses/commissions/overtime, etc.), pension/retirement income, annuities, alimony or child support, unemployment compensation, business, farm or rental income, etc.  The only income that is not counted in this calculation are social security, SSDI, or SSI benefits, and LINK and welfare benefits.  Occasionally, we can disregard potions of income from a non-filing spouse or other household member, if all of their income is not considered available for household use (for example, if your non-filing spouse has student loan, installment loan, and vehicle debts that are not included in your bankruptcy, the payment of these debts that they will still be required to make can be deducted from their income).

I’m over the income threshold.  Now what?  First, be aware that the six month average calculation only takes into consideration the 6-months prior to the month you are currently in.  Therefore, if you file on January 31st, none of January’s income is considered – only July – December’s income is.  On the other hand, if you file on February 1st, the calculation would be based on August – January income.  Therefore, some Debtors who have recently experienced a decrease in income may benefit from waiting a month or two to file, as the months that are averaged together may show decreased income over time, making a Debtor who is ineligible to file this month due to income possibly eligible next month.  A good example of this is with seasonal employees, such as persons employed in the construction industry, as there is usually a lull in the winter months that may make them able to file then, and not eligible in the summer when they are receiving a lot of overtime.  However, the same scenario is equally applicable to someone who recently lost a job and went on unemployment, or obtained a much lower paying job, as any decrease in income would be averaged with the higher months to hopefully make you eligible to file a Chapter 7 eventually.

But my income is steady, and I am still over the income threshold.  What then?  Just because a Debtor is over the income threshold does not automatically mean that they are not eligible to file a Chapter 7.  This is simply a “threshold” inquiry, and if over these limits, simply requires a longer calculation to be completed by your bankruptcy attorney.  In certain situations, a Debtor’s gross income (as taken into account in the calculation) does not accurately reflect the amount of disposable income available to a them at the end of the month.  For example, if a Debtor pays out a significant portion of his income in child support, then even when they are over the income threshold, after the child support deduction is taken into consideration, they typically have no remaining disposable income that is available for payment to creditors.  Similarly, if Debtor’s have large payroll deductions for insurance or mandatory retirement (I find this especially true for municipal employees and teachers), then they may also be in the same boat.  Other situations may include Debtors who owe a significant amount of priority debt (tax debt or child support arrears), or have large house or vehicle payments, as the calculation attempts to determine whether there would be any income left over that could be used to pay your other unsecured creditors.  Lastly, there is a presumption that even if you have some income left over at the end of the month, if your unsecured debt is significantly high enough that you would be unable with the amount remaining to pay at least 25% of it back over a 60-month period, then it is not worth it to the Court to push you into a Chapter 13, and you will still be eligible to file a Chapter 7.  As you can see, there are a multitude of ways for a Debtor to still be eligible to file a Chapter 7, even if they are over the income threshold.  The only way to really know one way or the other, is for a Debtor to bring in his/her paystubs, and for our office to do the complete calculation.

What if after all this, I still make too much and am ineligible to file a Chapter 7?  If a Debtor is over on the income threshold and deemed ineligible for a Chapter 7 due to having excessive income available to them, the Debtor can still file a Chapter 13 bankruptcy.  In such instances, however, the Debtor’s Plan in a Chapter 13 is required to be a 5-year Plan, unless the Debtor can pay 100% of the debts owed in less than 5 years.  The calculation of 6-month’s average income will be used to determine how much income is left over and available for payment to unsecured creditors in your Chapter 13 Plan.  Depending on your income and the amount of debt, this could be a payment to your creditors of anywhere between 0 – 100% (some further deductions are allowed in the Chapter 13 calculation that are not allowed in the Chapter 7 Means test calculation, such as voluntary contributions to retirement accounts and  401(k) loan repayments, so these could decrease your disposable income amount even further).

Lastly, even though a Debtor may be eligible for a Chapter 7 based on income, certain individuals elect to file a Chapter 13 for other reasons. If a Debtor is behind on a secured debt that he wishes to keep, such as a house or a car, and he wants to keep these items of property, he will opt to cure the arrearages in a Chapter 13 Plan.  A Chapter 7 will not save property in which the Debtor is not current at the time of filing (or if they fall behind during the pendency of the bankruptcy).  Also, since a Chapter 7 case is a liquidation bankruptcy, if a Debtor has significant equity in property or other assets, in order to avoid having them seized and liquidated, they may desire to file a Chapter 13 – a Chapter in which Debtors are entitled to keep all of their property in exchange for entering into a repayment plan for the benefit of their creditors.   Thus, some Debtors may need to file a Chapter 13 regardless of whether or not their income meets or exceeds the Means Test threshold for a Chapter 7.

As always, our office is happy to meet with you with regard to your specific asset, income, and debt situation.  If you provide our office with complete income information, we can determine whether or not you are over the income threshold and can also complete the longer calculation if necessary, to determine your eligibility for either bankruptcy Chapter.  Call us at 217-344-3400 to set up an appointment today!

www.manuelassociates.com  or Call Us : 217-344-3400

What Property Can I Keep If I File Bankruptcy?

exemptA common misconception by Debtors is that they will lose their property when they file bankruptcy.  A Chapter 7 case, for example, is a “liquidation bankruptcy” and the Trustee can sell any of the Debtor(s)’ assets which are over allowed exemption amounts, in order to pay a portion to the Debtor(s)’ unsecured creditors.  However, Debtors are allowed certain exemptions of their assets in bankruptcy.  Like all states, Illinois has its own set of exemptions that you may use when filing for Chapter 7 or Chapter 13 bankruptcy.  Some states allow debtors to choose between the state exemption system and a set of federal bankruptcy exemptions – but Illinois is not one of them. In Illinois, you must use the state exemptions.  The following is a short list of these exemptions, but is not exhaustive.

  • $15, 000 – Equity exemption in a primary residence (spouse may double  exemption to $30,000).
  • $2,400 – Equity exemption in 1 vehicle for each Debtor.
  • Generally unlimited – Clothing and wearing apparel
  • Unlimited – Retirement accounts (401(k), 403(b), IRA, SEP, SIMPLE, etc.
  • Unlimited – Education IRA’s and College Savings Plans.
  • Unlimited  – Prepaid funeral expenses.
  • Unlimited – Government benefits (Soc. Sec., SSI, Food Stamps, Welfare, Housing Benefits, Earned Income Credit, Child Tax Credits).
  • Unlimited – Health aids needed by the Debtor.
  • Generally unlimited – Child support / alimony received
  • Generally unlimited – Crime victim award proceeds
  • $15,000 – Personal injury award proceeds
  • Unlimited – Worker’s compensation awards
  • Unlimited – Family pictures, family Bible
  • Unlimited – cash value life insurance if the beneficiary is a spouse or dependent child of the Debtor.
  • $1500 – Books and implements necessary for trade or business.
  • $4000 – Wild-card exemption (can be used for any and all other assets).

How do you value property in a bankruptcy?  Generally the bankruptcy court uses the Tax Assessor’s assessed value for real property, unless the Debtor has a recent appraisal showing a different value. For vehicles, our office generally uses Kelly Blue Book’s private party value, or sometimes NADA, which can both be valued online.   As for all other personal property, it is valued at what you could get for it if you were to sell it at a garage sale or auction. On rare occasions, we are required to look up values for similar items selling in newspapers or at online auctions like eBay or listed on Craigslist.

As the value of most Debtor(s)’ possessions is typically on the lower end, and as Debtors are permitted a number of exemptions as listed above, a very high percentage of Debtors will not lose any of their assets or property when they file bankruptcy; their cases are deemed “no asset” cases.  If a Debtor does have significant equity in a non-exempt asset, he or she may  elect to file a Chapter 13 bankruptcy instead of a Chapter 7.  In a Chapter 13, unsecured creditors are entitled to receive as much as they would received in a Chapter 7 liquidation (or how much you can afford to pay them over the life of the plan, whichever is greater).  However, in a Chapter 13, the Debtor pays this amount in installments over the course of a 3 – 5 year Plan, and in exchange, gets to keep all of his non-exempt property.

If you have specific questions about your property or assets, and whether or not you would benefit from a bankruptcy filing, call Manuel & Associates at 217-344-3400.  We would be happy to counsel you with regard to your particular situation.

www.manuelassociates.com  or Call Us : 217-344-3400

Waiting for Your Tax Refund Before Filing for Bankruptcy? Big Mistake!

tax imageI just got off the phone with a potential bankruptcy client. We spoke for some length of time, during which she asked all the right questions regarding her own specific situation: can I keep my house and my car if I file, what are the costs associated with filing for bankruptcy, will mine and my husband’s income prohibit us from filing, etc. Normally, clients are not so prepared when they call, so it was refreshing for her to have thought things through enough to know what questions she wanted to ask. Just as she was getting ready to hang up with me, she stated “I’ll call you back and set up an appointment once I get my tax money back.”

Uh, oh.   Clients continue to make this same mistake every year, as the bankruptcy filings always seem to pick up between February and April. While tax refunds are not always an issue in every bankruptcy case (not all clients even receive a tax refund, much less a substantial one), there are an increasing number of Debtors that do receive refunds every year. And the ones who receive the largest refunds at tax time always are the ones who make the least amount of money throughout the rest of the year and cannot afford to lose these refund monies in their bankruptcy. These are the Debtors who rely on the Earned Income and Additional Child Tax Credits – refundable credits that can skyrocket the average tax refund for these particular Debtors to between $3,000.00 – $8,000.00.

Wait, you may say… aren’t the Earned Income Tax Credit (EITC) and Additional Child Tax Credits (ACTC) exempt? Yes, these particular credits are considered to be a “public benefit” and like welfare benefits, the portions of refunds attributable to these credits is exempt from attachment. But there is a catch: they are only exempt until such time as they are received – in other words, they are exempt only as a contingent interest. Once they have been received by the Debtor(s), the refund monies are then simply considered liquid – i.e “cash” – and can no longer be exempted under the “public benefits” exemption.

Now, all is not lost if a Debtor did not adhere to this advice, and received a tax refund prior to filing their bankruptcy case. In addition to the public benefits exemption, all Debtors are permitted a $4,000.00 “wild card” exemption to cover their personal property, which can include tax refunds (a married couple filing jointly has an $8,000.00 wild card exemption). However, what most Debtors do not realize is that their “wild card” exemption has to cover all of their other assets including: cash, bank account balances, household goods and home furnishings, jewelry, collectibles, sporting goods, guns, sometimes values of vehicles over the $2,400 regular exemption for 1 vehicle per Debtor, and/or additional vehicles, motorcycles, trailers, or boats. As you can see, the wild card exemption is typically used up by the Debtor in protecting their other assets from seizure by the bankruptcy Trustee, so there is often little left to be able to cover tax refunds. Any refunds that cannot be covered by an exemption will most likely be required to be turned over to the Trustee for distribution to creditors.

To see how this works in real life, let’s take this scenario: You complete your taxes for this year, and you are supposed to receive a $5,000.00 tax refund, consisting of an EITC of $3,000.00 and an ACTC of $1,000.00. If you file your bankruptcy before you receive your refund from the IRS, then we can exempt $4,000.00 of your $5,000.00 refund under the “public benefits” exemption, and will only have to attempt to fit the remaining $1,000.00 of the refund under the “wild card” exemption. If you wait to file until after you have already received your tax refund for this year, then we will not be able to claim anything under the “public benefit” exemption, and will have to fit whatever amount we can under the “wild card” exemption after taking into account your other assets. As the wild card exemption is only $4,000.00 to begin with, this will leave a substantial portion of your refund subject to turnover to the Trustee. As many clients do not have a lot of discretionary income to be able to pay the fees required to file bankruptcy, and many look to their annual tax refunds to be able to fund this endeavor, which Is equivalent to a double-edged sword.

What if you spent the money before you filed your case, you may ask? The Trustee will most likely ask to see documentation as to where the money was spent, and on what. The Trustee has powers to avoid transfers, and undo prior transactions, so that she can retrieve the money back for the benefit of your creditors. Also, the Trustee could simply make you pay the estate back the non-exempt funds before you will be able to get your bankruptcy discharge. This is why it is so important, if you can manage it at all, to file your bankruptcy BEFORE you receive your tax refund. As always, if you have a specific question regarding your particular situation call Manuel & Associates at 217-344-3400, and we will be happy to discuss it with you. We want to help you make the right decisions regarding your options, before you make that big mistake!

www.manuelassociates.com  or Call Us : 217-344-3400

Can I Keep My House and My Car If I File Bankruptcy?

house

I am often told by clients at the initial consultation that they do not want to include the house or car in their bankruptcy.  However, this is not possible, as all assets and all debts are required to be listed in your bankruptcy schedules, or else you will be subject to bankruptcy fraud.  What clients really mean is that they do not want to lose these items, and are concerned that if they file that these items will be taken from them.  That is rarely the case, as Debtors are provided certain exemptions in bankruptcy that will often allow them to retain most, if not all, of their property.  If a Debtor is over the allowable exemption limits, and the Trustee is not likely to abandon the asset back to the Debtor, then the Debtor always has the option of filing a Chapter 13 case instead of a Chapter 7, and paying the non-exempt amount over a 3 – 5 year period, and will be able to retain the asset.  (See here for a  description of the difference between these two bankruptcy Chapters.)

As indicated previously, all debts need to be listed on the Debtor’s bankruptcy Schedules, regardless of whether or not they are secured, unsecured, or priority debts.   In a Chapter 7, with most secured debts, you have three basic options: reaffirm the debt, redeem the property for the market value, or surrender the property to the creditor.

Reaffirmation: A reaffirmation agreement is a legally enforceable agreement to repay all or a portion of a debt.   In order for the agreement to be valid, both you and the creditor must sign the agreement, as well as either your attorney or the Judge. Once all parties have signed the agreement it must be filed with the court prior to the deadline issued by the Court. This agreement basically re-instates the debt with the exact same principal balance, interest rate, and other terms, as if a bankruptcy was never filed. In order to do this, you must be current on the loan at the time of filing, and remain current on the loan throughout the bankruptcy! If you fall behind, the creditor can file a Motion to Lift the Stay (which will be allowed by the court if you are truly behind on payments), which will only add attorney’s fees and costs for the Motion onto your debt!  The creditor may also refuse to enter into the reaffirmation agreement altogether if you fall behind, and you may lose the ability to retain the collateral!

A creditor that has a debt secured by an interest in real property (e.g., a house) cannot foreclose on the property simply because you chose not to reaffirm the debt. However, the creditor may elect not to send you statements and may chose not to report payments to credit reporting agencies.

A creditor that has a debt secured by an interest in personal property (e.g., a car) may repossess the property if you have not entered into a reaffirmation agreement or redeemed the property within 45 days of your creditors meeting.

In order for the reaffirmation agreement to be valid either your attorney or the judge has to approve it.  Your attorney must sign a declaration that they believe that the agreement does not impose an undue hardship on you or your dependents.  Often attorneys will not sign off on the Reaffirmation Agreement if your budget does not support the position that you can afford the payments, or if the interest rate is unreasonable or the value of the property is significantly less than the amount owed on the debt.  If your attorney will not sign the Agreement, the Reaffirmation Agreement will be set for hearing for approval by a Judge.   The Judge will explain to you the consequences of reaffirming, and ask you several questions about your ability to afford the payments, and whether or not you are current on the loan.  The judge will ultimately decide whether or not to approve the reaffirmation agreement at that hearing. Such a hearing may also be required at the judge’s discretion if he deems that the value of the item is not worth the amount you are reaffirming, your income does not meet your expenses, or any other factor that the court deems is questionable and desires your appearance. If you do not appear at a reaffirmation hearing, if required, the reaffirmation agreement will not be approved.

Once you have gone through this process, the creditor cannot repossess the property unless you are in default on your contract (e.g., behind on the payments or don’t have insurance). Debtors who timely enter into Reaffirmation Agreements and stay current with their loan payments may keep their cars even if the bankruptcy court does not approve the reaffirmation agreement.

If you do not reaffirm a debt, the debt itself will be discharged at the end of your bankruptcy, however the lien on the collateral still survives.  The creditor may be able to foreclose on their lien or repossess the collateral to be able to sell it and obtain the proceeds.  However, the creditor will not be able to pursue you for the debt, or any deficiency if the property sells for less than the balance that was owed.

Redemption: You can also choose to redeem the property by paying the creditor the current market value of the property instead of what is owed. This has to be done by Motion filed with the Court, and the Debtor is generally required to pay the redemption amount in one lump-sum payment to the creditor during the bankruptcy. This is a good option for Debtors who owe a lot on something that is now worth very little. However, since it must all be paid in a lump-sum, this is rarely an option in cases where the market value of the item is very high. It is also difficult to get a new lender to agree to finance a new loan for the item when you are in the middle of a bankruptcy, but it is possible and you can attempt this.

Surrender: The third option is to surrender the property and walk away free and clear. The creditor gets the collateral and is free to sell it and get what they can, but the debt owed by the Debtor to them is discharged in the bankruptcy.

Avoidance of liens: There is also a fourth option, in cases where the Debtor has put property down as collateral for a loan that they already owned prior to the loan being made. An example of this is a cash advance company which asks the Debtor to sign a document which makes his existing household furniture and electronics collateral for the loan. These types of loans impair the exemption the Debtor has in his personal effects, and thus this lien can be avoided by filing a Motion with the Court. Avoiding the lien on this property makes the debt then unsecured and dischargeable in bankruptcy.   Again, the date of the loan must be more than 70 days prior to the bankruptcy filing in order to be dischargeable.

In a Chapter 13, you will be paying your regular monthly mortgage payments outside of the Plan, while any arrearages you owe at the time of filing will be paid inside the Plan.  Cars are usually paid for inside the Plan, and depending on the finance date of the loan, the principal balance and/or interest may be able to be reduced.   Other property liens may be “crammed down” to market value and paid over time at a reasonable interest rate inside the Plan. “Cram down” plans are available for vehicles that have been financed for more than 910 days (2 ½ years), and for other personal property where the loan is older than 1 year. You can also opt to surrender property in a Chapter 13, but the difference between the amount you owe and the amount the item is worth becomes an unsecured debt, and depending on your income, you may be required to a portion to unsecured creditors in the Plan.

www.manuelassociates.com  or Call Us : 217-344-3400

What is the Difference Between a Chapter 7 and a Chapter 13?

debtThere are actually several different Chapters of the Bankruptcy Code, but the two Chapters  most frequently used by individual Debtors (as opposed to business Debtors) are either Chapter 7 or Chapter 13.

A Chapter 7 is referred to as a “fresh start” or a “clean slate bankruptcy.” This is liquidation bankruptcy.   In a Chapter 7, the trustee can sell any of the Debtor(s)’ assets (“liquidate”) which are over allowed exemption amounts, in order to pay off a portion of the Debtor(s)’ unsecured debt.   Normally, assets do not get liquidated in a Chapter 7, but your attorney can explain more about this process after reviewing your asset situation.  A Chapter 7 typically has a very short duration, with most bankruptcies only last approximately three (3) months from start to finish.  As such, it is usually the cheaper and the faster of the two Chapters.

A Chapter 13 is a wage earner Plan, so you must be employed or have some other regular source of income. Individuals who have less than $307,675 in unsecured debt and less than $922,975 in secured debt may file under this Chapter. A plan is proposed to repay some or all of the debt.  A trustee oversees administration of the plan.  Debts are prioritized as either priority debts, secured debts, or unsecured debts.  As such, most plans are often not a complete repayment of the Debtor(s) debts, and whatever debt is leftover at the end of the successful completion of the Plan is discharged by the court.   Generally the plan must provide for payment of secured creditors in full or according to the terms of the contract if the security is retained (e.g., home loans and vehicles).   However, some secured creditors may have their claims modified.  The plan must also pay all administrative and priority creditors in full.  Unsecured creditors are entitled to receive as much as they would receive under Chapter 7, or how much you can afford to pay them over the life of the plan, whichever is greater. The Plan is usually paid in installments over the course of 3 – 5 years.

Why would anyone choose a Chapter 13 over a Chapter 7?

Some Debtors are not eligible to file a Chapter 7, because their income is too high to pass the Means Test, which is based upon the Debtor’s household size and geographic region.

Additionally, if the Debtor is behind on a secured debt and they want to keep the property securing the debt, we cannot do so in a Chapter 7.  Thus, houses that are in foreclosure or behind on payments, or vehicles that are threatening repossession (or even ones that have been repossessed recently but not yet sold), can be saved in a Chapter 13.

There can be advantages to a Chapter 13 over a Chapter 7, such as the elimination of accruing interest, preventing foreclosure or repossession, and the possibility of reducing principal and/or interest on certain financed vehicles, which can be discussed with your attorney.  A Chapter 13 may also be a good option for Debtors fighting tax liens and IRS collection actions, as an affordable repayment plan can be entered into, with the possibility of even be able to discharge tax debts older than 3 years.

www.manuelassociates.com  or Call Us : 217-344-3400