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



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:

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