New Illinois Maintenance (Alimony) Support Guidelines and Calculations: What Do They Mean To Me?

In Illinois, under the old statutory guidelines, judges had a lot of discretion in determining the amount and even the duration of maintenance (what many refer to as “alimony”) to be awarded between the parties in case of divorce.   While there are several specific factors the judge must take into consideration in deciding whether or not to award maintenance in any given case, it was often difficult to make an accurate prediction as to what the maintenance award would actually be, or as to how long maintenance would be paid.  Under the old statutory regime, a spouse could either be awarded temporary (or “rehabilitative”) maintenance, for them to perhaps have time to go back to school or otherwise obtain skills or training necessary for them to seek gainful employment, or the award could be permanent.

Now, under the new law that went into effect on January 1, 2015, judges still use their discretion in applying the statutory guidelines to determine if a maintenance award should be awarded, however, now the new guidelines have utilized a standardized formula to calculate the amount of maintenance awarded, as well as the duration of the payments.  Here is an example of the new guideline calculations, and how they work:

DURATION OF MAINTENANCE AWARD:

(Marriage 0-5 years) x (20%)
(Marriage 5-10 years) x (40%)
(Marriage 10-15 years) x (60%)
(Marriage 15-20 years) x (80%)
Marriages of 20+ years – court shall order either permanent maintenance or the length of the marriage

 

AMOUNT OF MAINTENANCE AWARD:

(30% of the payer’s income) – (20% of the receiver’s income)

*The receiver’s new income cannot exceed 40% of the parties’ combined income.

** Gross income is used for the maintenance award calculation, since maintenance paid to another spouse is deductible from taxable income on the paying spouses’s taxes, and counted as taxable income on the receiving spouse’s taxes.

EXAMPLES:

Maintenance Calculation on a Marriage with Two Incomes

Let’s say we have a couple who has a combined annual income of $200,000 per year, and who has been married for 16 years.

The wife’s income is $125,000 per year
The husband’s income is $75,000 per year

Assuming the court determined maintenance should be awarded, the court would calculate the maintenance award using the new formula:

($125,000) x (30%) = $37,500 (wife)
($75,000) x (20%) = $15,000 (husband)
$37,000 – 15,000 = $22,500

According to this calculation, the husband would be awarded $22,500 per year. However, when the maintenance is combined with the husband’s annual income of $75,000 it is over 40% of the couple’s combined annual income.

($200,000) x (40%) = $80,000
$22,500 + $75,000 = $97,500 (around 49%)

The husband’s maintenance award would then be decreased to around $5,000 per year to comply with the 40% rule. Finally, the court would calculate the duration of the payments.

(16 years) x (80%) = 12.8

CALCULATED AMOUNT AND DURATION OF DIVORCE MAINTENANCE AWARD

In this case, the husband would be awarded:

AMOUNT – $5,000 per year
DURATION – 12.8 years

 

Maintenance Calculation on a Marriage that Relies on One Income

Now, let’s say we have a couple with an annual income of $200,000 per year, and who has been married for 16 years, but only one of the parties earns an income.

Husband’s income – $200,000 per year
Wife’s income – $0

Assuming the court determined maintenance should be awarded, the court would calculate the maintenance award accordingly:

($200,000) x (30%) = $60,000 (husband)
($0) x (20%) = $0 (wife)
$60,000 – $0 = $60,000

According to this calculation, the wife would be awarded $60,000 per year. Since the maintenance award, when combined with the wife’s annual income of $0, is less than 40% of the couple’s combined annual income, the award does not need to be reduced to comply with the 40% rule.

($200,000) x (40%) = $80,000
$60,000 + $0 = $60,000 (equal to 30% of the couple’s annual income)

Finally, the court would calculate the duration of the divorce maintenance payments.

(16 years) x (80%) = 12.8

CALCULATED AMOUNT AND DURATION OF DIVORCE MAINTENANCE AWARD

In this case, the wife would be awarded:

AMOUNT – $60,000 per year
DURATION – 12.8 years

As you can see, the application of these new guidelines is significantly different than the way maintenance was awarded just a few years ago.  This can have a big impact on the amount and duration of the maintenance awarded in many cases.  However, the standardized formula takes a lot of the guesswork out of these type of cases, and allow the parties to more fully prepare for the impact a divorce will have on their particular situation.  Also note that the difference in the amount and duration of maintenance awarded at each separate benchmark (between 4 and 5 years, 9 and 10 years, and 19 and 20 years of marriage) is significant enough to make the potential payee spouse perhaps want to wait to file a divorce case until after that higher threshold marriage date is met.  Additionally, maintenance awards are on top of child support obligations, which also have their own statutory guideline calculations.   Additionally, as indicated above, maintenance paid is deducted from the paying spouse’s taxable income at the end of the year, while maintenance received is added to the receiving spouse’s taxable income on their annual tax returns.   All of these factors are considerations that you should keep in mind while consulting a skilled divorce attorney with regard to your particular case.

Garnishments vs.Wage Assignments: What is the Difference?

garnishment

I often have clients contact me once their employer starts deducting a garnishment from their paycheck.  Many are confused about the difference between an actual wage garnishment and deductions due to a wage assignment.  A garnishment can only occur if the creditor has gone to court and obtained a judgment against you.  A wage assignment on the other hand, is a voluntary agreement entered into by you, usually at the time you entered into the loan agreement with the creditor.

Under Illinois a wage assignment must be a document that is completely separate from the loan itself, and must be clearly labeled a “wage assignment.”  Before the creditor can send the wage assignment to your employer, you must be at least 40 days behind on your loan.  The creditor must mail both you and your employer a notice that they will begin garnishing your wages in 20 days if you don’t get caught up on your loan payments.  This notice has to be sent to you by regular or certified mail, so you should receive advanced notice that your wages are going to be garnished.

Because a wage assignment is a voluntary agreement, it is revocable in writing at any time – including AFTER it has been sent to your employer, or even after the garnishment has already started (although you will not be able to get any funds back that have already been taken, and can only stop future garnishments).  To do so, you must send a letter, in writing, to both the creditor and to your employer indicating that you are revoking the wage assignment.  Sign and date the letter, note the creditor’s account number on it if possible, and make a copy of the letter for your records before you serve it on the creditor.  You can deliver it in person (make a note of who you delivered the letter to), or you can mail it (certified mail is advised, as then you have a record of receipt).

If, instead, you have received notice of a garnishment as a result of a court judgment, these are allowed by law as a method of enforcement, and cannot simply be stopped by mailing a letter.  However, first make sure that the deduction is correct.  The amount that can be deducted with either a wage assignment or a garnishment is the lesser of 15% of your gross pay, or the amount of your net pay over 45 x the federal or state minimum hourly wage ($371.25 per week), whichever is greater.  That means that you can only have a wage assignment if you take home over $371.25 per week.  (Please note that net pay for garnishment purposes is gross pay minus only federal and state taxes, social security and Medicare deductions.  Other deductions like insurance, union dues, or for 401(k)/retirement have to be added back in to determine your net pay in a garnishment situation to determine if you make over $371.25 per week.

Ok, so what can you do if your income is over this amount and, thus, the garnishment is legitimate?  Answer: file bankruptcy.  A bankruptcy will stop all garnishments as soon as the case is filed.   This is because the bankruptcy filing starts the automatic stay, which halts all court cases, including garnishments, and no new cases can be filed.  A Chapter 7 bankruptcy lasts approximately 3 months, and at the end you will receive a Discharge of Debts, so you will no longer owe the debt at that time, and the creditor can no longer garnish your wages for it.

Have questions about bankruptcy?  See our other articles to learn about the process:

Am I Eligible to File a Chapter 7 Bankruptcy?

What Property Can I Keep If I File Bankruptcy?

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

What Is the Difference Between Chapter 7 and Chapter 13?

10 Steps to Filing For Bankruptcy

Bankruptcy and Divorce

 

More Questions?

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

10 Steps to Filing for Bankruptcy in 2016

2016Thinking about filing bankruptcy?  Make 2016 the year of being proactive about debt problems, instead of being reactive.  Too many times, the decision to file for bankruptcy comes after a lawsuit is filed and a judgment is entered, the garnishment has started, or the bank account has been levied.

Knowing you are in a financial crisis and that creditors are hovering makes planning easier, even if bankruptcy is your ultimate course of action.

If you need to file bankruptcy in 2016, hear are the steps to help you be prepared:

1. Review your credit reports.

You need to know how much you owe and who you owe in order to make the best decision for your particular circumstances.  Are the balances so high that you cannot reasonably expect to pay them off within the next 5 years?  How high are the interest rates?  Is a creditor lawsuit or garnishment imminent?  Remember, even old accounts could lead to a lawsuit.  That means creditors might be preparing a lawsuit against you while you’re reading this.  Are you able to negotiate with your creditors to settle your debts for less or lower interest rates?   A free site for obtaining both your credit report(s) and credit score is creditkarma.com, and this site lets you login anytime to see updates to your reports.  You can also obtain free credit reports from all 3 credit reporting agencies once per year at www.annualcreditreport.com, however if you use this site please either save or print a copy of the report(s) that you pull for your attorney, as you will not be able to access them again for another year.

2. Look at the public record section of your reports.

Are creditor judgments showing up in your credit file?  Are filed tax liens listed?  Judgments do not always show up on your credit, but if you do have any court judgments or tax liens at all, know that the creditor  may attempt a bank levy or a wage garnishment at any time.

3. Check to see if your current employer or bank is listed on your credit report.

Collection agencies and creditors do their best to search for information about you when they are planning on filing a lawsuit, or attempting a wage garnishment or bank levy.   They first look at your credit report, as your current address, current employer, and even the bank you bank with may be listed as a creditor on that report.  A valid residential address and/or employer address will ensure that a creditor will be able to find you to serve you with Summons in any lawsuit.  And knowing your current employer or bank information will allow a creditor to easily institute a wage or bank garnishment as well.

4. Prospective employers can show up under the “credit inquiry” section.

Anyone looking at your credit will appear under the “credit inquires” section. For instance, you may be applying for a job, and as part of the application may authorize your prospective employer to conduct a credit check. Even if not divulged elsewhere on your credit report, this information tells a creditor two things: (1) approximately where you live, because you are likely looking for work near your home, and (2) where you may have just started working.  Clients who recently started a job and then have their wages garnished soon thereafter are often confused as to how the creditor found out about the job so quickly.

5. Be especially careful during tax season.

Creditors are very aggressive February through April. They know you are getting a tax refund and usually that refund gets directly deposited into your bank account. The bank levy can happen at any time, even right after the refund hits your bank.  Speaking of which, leads into our next point:

6. Keep bank accounts low.

Once they have obtained a judgment against you, creditors can easily levy bank accounts.  As most banks now have several different branch offices, the creditor doesn’t have to levy the branch where you opened your account.  They simply provide the corporate office with the judicial order authorizing the bank levy.  If the creditor looks at your credit report and sees a credit inquiry, the creditor also will look for small banks and credit unions near that employer’s location, or for banks where you might be banking but may also have a small loan or credit card account showing up on the credit report.  You could have your rent or mortgage money in the account when it is levied, or checks outstanding that have not cleared, which will then overdraft your account when they hit.  And filing bankruptcy after the levy means you are unlikely to get that money back.  If a bank levy is an imminent possibility,  you may want to consider having paychecks or other money deposited onto a money card instead, as these are often harder to discover and levy against.

7. Don’t bury your head in the sand.

Doing nothing will not make everything go away.  There is nothing worse than having to react to a financial crisis after it has occurred.  You stand to lose much by waiting, as beside bank levies and wage garnishments, if you fail to appear in court in response to a Rule to Show Cause or a Citation to Discover Assets a body attachment (warrant) can be entered against you and you could wind up in jail.  Make bankruptcy be a decision that you plan for, and not something you are forced into when your back is against the wall.

8. Contact the creditor to preempt collection efforts.

Avoid a bank levy or wage garnishment by contacting the creditor.  Perhaps you can convince them that your assets and/or wages are exempt and that it is not worth their time and effort to pursue you.  Maybe you can reach a payment agreement to forestall collection by the creditor, or negotiate to settle your debts for less. However, please be aware that if there is an open court case with regard to that creditor (regardless of whether or not a judgment has yet been entered), DO NOT sign any payment agreement in writing.  This agreement could then be incorporated into a court order, and if you later fall behind on payments under the agreement it can be prosecuted as contempt of court for violation of a court order, which can also land you in jail.  Also, if you do settle out a debt and the creditor writes off $600.00 or more in bade debt, be aware that you will receive a 1099-C in the mail next year that you will need to report on your taxes as income, which may raise your taxes and could impact the Earned Income tax credit or or other tax credits.  (Bankruptcy does not result in a 1099-C, and does not impact your taxes.)

9. Start your bankruptcy attorney payment plan right away.

If you can’t afford the creditor’s payment plan, start paying your bankruptcy attorney right away. You can make weekly, bi-weekly, or monthly payments now, and likely will have the balance paid off within a short time and will be ready to file before a creditor has time to cause you much damage.  Our office can file a motion at the time we file your case to pay the court filing fee in installments after the case is filed and while the case is pending, so the client does not have to come up with this additional money beforehand.  You might also be able to use your tax refund to pay off any balance owed.

10. Once you’re finished paying, immediately file your case.

Don’t be the client that pays, but never sends back in the paperwork, or fails to complete the online Debtor counseling class that is required to file the case.  Often I am holding onto a client’s money and their file for several months, only to be contacted after the levy or garnishment begins. I can stop future garnishments, but sometimes I can’t get the money back for the client if it has already been levied.  Once you have paid the attorney fee balance, keep in touch with your attorney, and get them all the necessary paperwork in order to file your case as soon as possible.

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

BANKRUPTCY AND DIVORCE

divorce-love

Divorce and bankruptcy often go hand-in-hand.  Many divorces are attributed to overwhelming financial debt, a job layoff by either party, or other significant reduction in income.  Also, it is inevitable that the financial pressure only increases upon the separation of the parties, as now the same income must support two separate households instead of just one.  The addition of child support and/or alimony being levied against one party may also contribute to that party’s overall inability to meet their financial obligations.

Absent a bankruptcy filing, the creditors’ legal rights are not directly affected by a divorce.  Joint debts owed to creditors survive intact, and creditors can continue to pursue either or both spouses, including pursuing all available state law remedies such as foreclosure, wage and bank garnishments, repossession, liens, or levies.   This is true even if one spouse agreed to pay the other spouse’s bills in the divorce, because the creditor was not a party to the divorce action and thus, such an arrangement remains strictly  an agreement between the parties themselves.  The harmed party’s sole remedy then lies with enforcement through the family law court, which is often costly and time-consuming.

Consequently, divorcing spouses often consider filing bankruptcy, either individually or as a joint Petition.  However, due to the nuances contained in the Bankruptcy Code, it is important for spouses and family law attorneys to consider the implications of divorce orders and settlements in advance – BEFORE they are finalized by the divorce court.  Otherwise, short-sided debtors may find themselves in the precarious position of having to pay debts that they can ill afford, and which might have been dischargeable but for the divorce proceedings themselves.

Most people are aware that domestic support obligations — alimony / spousal maintenance and child support obligations — are not dischargeable in bankruptcy.  11 U.S.C. 523(a)(5).   However, few people are aware that other debts, which would normally be dischargeable if a Debtor files a case before a divorce is entered, can be made non-dischargeable simply by way of the divorce settlement or court order.   11 U.S.C. 523(a)(15) controls the Chapter 7 dischargeability of “property division” obligations and other non-domestic support obligations, and states that the general discharge does not apply to a debt owed “to a spouse, former spouse, or child of the debtor and not of the kind described in [Section 523(a)(5)] that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, or a determination made in accordance with State or territorial law by a governmental unit.”  In layman’s terms, this means that if one spouse either agrees in a divorce settlement, or is otherwise court-ordered to pay a particular debt or debts, and is to indemnify and hold the other party harmless thereon, then those debts then become non-dischargeable in a subsequently filed bankruptcy case filed by that party.  This is true even if the ex-spouse is not personally liable for the debt and was not directly damaged by the non-payment.  Courts have held that the indemnification provision in the parties’ marital settlement agreement creates a new debt that runs between the spouses. See In re Harn, 208 WL 130914 (Bankr. C.D. Ill. 2008).

This is why planning is of vital importance!  Under most circumstances, it is advisable to file a bankruptcy case before obtaining a divorce judgement.  The divorce can have been filed and still be pending at the time of filing of the bankruptcy case, as long as the final judgment concerning property and debt allocations have not yet been entered.   Once a bankruptcy has been filed by a party, the divorce Judge is prohibited from assigning the filing party any of the debts that were included in the bankruptcy.  (Therefore, for single filing cases, it is important that all marital debts are included in the bankruptcy filing – even those that may be in the other spouse’s individual name.  The other spouse can be listed as a co-debtor for those and any other joint debts.) This does not keep the divorce court from ordering a filing spouse to pay alimony and/or child support, but said obligations would be non-dischargeable in bankruptcy regardless of when they were incurred, so this is not really an issue with regards to the timing of the filing of a case.

As explained, there is generally no distinction in a Chapter 7 regarding the dischargeability of different types of the two different types of family law obligations.  However, a Chapter 13 could not be more different.  Chapter 13 discharges are divided between the uncommon “hardship” discharge of Section 1328(b) and the common general discharge of Section 1328(a). Chapter 13 debtors who are granted a “hardship” discharge are NOT discharged from debts relating to property division obligations. However, the court’s entry of a general chapter 13 bankruptcy discharge after the successful completion of a confirmed chapter 13 plan DOES discharge an individual debtor’s debts relating to property division obligations. See Section 1328(a)(2) by omission.  Therefore, for debtors who did not plan ahead and now owe debts that they agreed to take on in a divorce but can no longer pay, this may be a way out.  However, Chapter 13 is much more onerous than a Chapter 7 when it comes to traditional domestic support obligations: if a debtor owes an arrearage for alimony or child support, this usually must be paid in full in the Plan unless the debtor can show that this would pose a hardship, and then is payable only to the extent the debtor is able, but any unpaid amounts still would remain non-dischargeable.  What’s more, a precondition to a chapter 13 general discharge  requires a debtor to pay all domestic support obligations that have come due AFTER filing the bankruptcy case, and to certify under penalties of perjury that all domestic support obligations owed as of the date of the certification have been paid, (including amounts due before the case was filed, but only to the extend provided for by the plan).   Thus, if the Debtor can successfully complete a 3-5 year bankruptcy plan, and pay all alimony and child support obligations during this time, they would be able to discharge their other debt obligations.

However, an ounce of prevention is better than a pound of cure, and thus, a little pre-planning can eliminate this costly mistake that is made by debtors everyday – debtors who simply do not know the perils of their decisions.  What is even worse though is that there are family law attorneys that fail their clients miserably by not knowing the intricacies of bankruptcy law and how the two fields interrelate.  More family law attorneys need to understand the consequences of the wording routinely espoused in settlement agreements and  divorce decrees, and advise their clients appropriately.  More widespread knowledge of these laws will help divorce clients make more informed decisions when it comes to their cases, and the eventual outcome will not come as a surprise to those who find that they cannot meet their financial obligations post-divorce.

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

 

 

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.

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

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

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