How Bankruptcy Helps Seniors Protect Assets

seniorMany seniors in Illinois continue to struggle since the downturn in the economy that began over 10 years ago.  Take Millie for instance: a 67-year-old who took early retirement a few years back when it was offered by her employer, due to health concerns.   A few years into retirement, with a substantially lower income, and healthcare costs rising, soon her debt-load mounted and the creditors began calling.  When her husband died, and with the loss of his income as well, Millie soon saw that the hole she was digging was only getting deeper, with no possibility of it ending.   She wanted some financial peace back in her life, instead of having to constantly live with the stress of phone calls and collection letters.  So she decided to call our office and file a Chapter 7 bankruptcy, a liquidation case in which assets are, on rare occasions, liquidated to repay creditors.  (For an explanation of what personal property a Debtor is allowed to keep if they file a bankruptcy in Illinois, please see our article here).

As our office often informs our clients, bankruptcy is the ultimate trump-card.  Once a bankruptcy petition is filed, creditors can no longer contact the client by phone or mail, and they cannot file or continue lawsuits that have been filed, or continue any wage or bank garnishments.  (The only main exception to this is with regard to enforcement of alimony and/or child support obligations.)  Therefore, the initial filing itself provides a level of peace and stability for clients to be able to get back on their feet, and begin to rebuild again.  For seniors especially, this can ease a lot of concerns, as instead of merely worrying that their children will inherit only debt,  they can actually be able to begin saving again and enjoying their golden years.

Especially for the older generation, bankruptcy can bring much-needed relief from debt brought on by medical expenses or helping out their children in need.  However, what is unfortunate is that the moral and emotional stigma of a bankruptcy often prevents retirees from getting help right away.   Clients often postpone bankruptcy for several years before filing as the shame of being financially strapped, and their own moral compass, frequently delay their visit into the office.  Getting over the stigma of bankruptcy is often the hardest part of the bankruptcy process for these clients.

However, waiting until the last minute to file is usually the opposite of what retirees should actually do.  If their situation is not likely to improve, and it is not merely temporary, then retirees should be more proactive in seeking assistance and file a bankruptcy right away, instead of waiting until they run out of options.   By spending retirement assets in an attempt to try to pay off debts, retirees risk a downward financial spiral from which they are far less likely to recover than younger generations.   A much better strategy is to defend and keep assets out of the hands of creditors, in order to provide retirees more options as they age.

Federal bankruptcy laws protect retirement accounts, and both income and retirement savings are usually untouchable by creditors, and are a protected asset in a bankruptcy filing.  Social security benefits, pension plans, IRA’s, 401(k) and 403(b) plans, as well as other qualified profit-sharing and retirement plans are typically exempt from the reach of creditors.  Social security income is additionally not counted on the Chapter 7 Means Test, which determines whether or not a person will be eligible to file a Chapter 7 or if they will be required to file a Chapter 13.  Social security income is also not counted in the calculation of disposable income in a Chapter 13.  (For more about the Means Test and eligibility to file a Chapter 7, see our article here.)

Retirees can also usually avoid losing their home and their vehicles by utilizing exemptions.  For instance, the homestead exemption is intended to protect the equity of the Debtor’s primary residence in a bankruptcy. (Equity is the market value of real estate minus any mortgages or other liens on the property.)   In Illinois, a single Debtor can claim a homestead exemption of up to $15,000.00 in equity, while a husband and wife can claim a double-exemption in the amount of $30,000.00.   A widow can claim their deceased spouse’s homestead exemption, as can a Debtor with dependent children in the home whose spouse has deserted the family.   (For more information on how exemptions are treated with respect to houses and vehicles, please see our article here).  However, even if the equity in property exceeds the maximum amount that can be claimed, do not fret – the client is still eligible to file a Chapter 13, and would simply propose a plan to pay the amount over their claim of exemption to their creditors over a 3 to 5 year period.

Is a bankruptcy always required?  No.  Often low-income clients are judgment-proof.  If they simply refuse to pay the creditor, there is often little a creditor can do.  Yes, creditors can still take the retiree to court, and even get a judgment entered against them, but a judgment is only as good as the paper it is written on.  Since the creditor cannot go after retirement account assets or social security income, the retiree may have little else.  Thus, refusal to pay is another strategy.   But caution is to be emphasized here – creditors often still attempt to freeze bank accounts,.   While this can usually be undone, it requires the client to go into court and prove that source of the funds in the account were exempt, and often leaves them without use of said funds for a significant period of time while awaiting the court date .  Also, if the Debtor owns real estate, this is not a sound strategy, because once the creditor obtains a judgment, they can file the judgment with the County Recorder of Deeds and then that judgment becomes an encumbrance against the real estate, preventing it from being sold without the creditor being paid.   Also, there is much to be said for the peace of mind that comes from a bankruptcy filing, as some individual clients have told me that they came to the decision to file simply because they could not handle the stress of the constant creditor harassment.

No matter what path the client ultimately decides to pursue, it is imperative that they seek the help of an experienced debt counselor or attorney right from the start, so that they can understand all of their options and the ramifications of any decisions.   I have counseled prospective clients who, before they decided to contact my office, made the mistake of using retirement funds (funds that normally would have been exempt) to negotiate and “settle” out debts with their creditors.  These prospective clients were then surprised with a huge tax liability the following year due to the disbursement from the retirement account being taxable, an added 10% penalty for early withdrawal, and on top of all of that, each creditor that they “settled” with sent them a 1099-C for debt that they had written off in the settlement, which then became taxable income to the clients for that year.   And this increased tax liability was also non-dischargeable in bankruptcy, putting them in an even worse situation than they had been previously – with no retirement assets, and a huge non-dischargeable debt with no source of funds from which to pay it.   Do not make the mistake these clients did – speak with someone knowledgeable before you make any rash decisions with regard to your debt situation.  We are here to help, and do not charge for consultations.  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.  or Call Us : 217-344-3400