Things to know about bankruptcy Lawyer Manual

What will happen to the clients' car and home?

In most cases, the consumer debtor will not lose home or car during a bankruptcy case as long as the client’s equity in the property is fully exempt. Even if the property is not fully exempt, the debtor will be able to keep it, if they pay its non-exempt value to creditors in Chapter 13.

However, some of the creditors may have a “security interest” in the home, automobile or other personal property. This means that the debtor gave that creditor a mortgage on the home or put other property up as collateral for the debt. Bankruptcy does not make these security interests go away. If the debtor doesn’t make payments on that debt, the creditor may be able to take and sell the home or the property, during or after the bankruptcy case.

There are several ways that the debtor can keep collateral or mortgaged property after filing the bankruptcy. If they are current on her payments, they can agree to keep making payments on the debt until it is paid in full. In a Chapter 7 case, if the property is exempt personal property (and intended primarily for personal, family, or household use), they can pay the creditor the amount that the property is worth. This is called redemption, and the payment has to be in a single payment. 11 U.S.C. § 722. For example, if the debtor wanted to redeem a vehicle valued at $5,000 that has a loan of $15,000, the debtor could pay the lender $5,000 to keep the vehicle, leaving the lender with a $10,000 unsecured claim.  Redemption only applies to personal property (e.g., cars, household appliances, etc.) and cannot be used on real property.

In some cases involving fraud or other improper conduct by the creditor, the debtor may be able to challenge the lien on the collateral. If the debtor put up her household goods as collateral for a loan, other than a loan to buy them, they may be able to keep that property without making any more payments on that debt by filing a motion to avoid the lien if the property is exempt.

What can the debtor own after bankruptcy?

Many people believe they cannot own anything for a period after filing for bankruptcy. This is not true. The debtor can keep exempt property, and generally anything obtained after the bankruptcy is filed. However, if the debtor receives an inheritance, a property settlement, or life insurance benefits within 180 days after filing for bankruptcy, that money or property may have to be paid to creditors if the property or money is not exempt.

In a Chapter 13 bankruptcy, the debtor has an ongoing obligation to report any assets they acquired after the filing of the case, un until the bankruptcy case is closed. 11 U.S.C. § 1306.  For example, if the debtor has a personal injury lawsuit from a traffic accident that occurred after the filing of the case, they must amend their A/B property schedules to list that lawsuit.  If the debtor does not report the accident as a potential asset during the bankruptcy case, the debtor-plaintiff may risk losing the right to prosecute a lawsuit based on the accident thereafter.  Barnes v. Lolling, 2017 IL App (3d) 150157 (June 27, 2017) Fulton Co. (Holdridge).

How will future credit be affected?

There is no clear answer to this question. Unfortunately, if the debtor is behind on bills, their credit may already be bad. Bankruptcy will probably not make things any worse.

The fact that the debtor has filed a bankruptcy can appear on their credit record for ten years. But because bankruptcy discharges most old debts, the debtor is likely to be in a better position to pay current bills, and therefore may be better able to get new credit.

Other things to know

Discrimination. A government agency cannot discriminate against the debtor because of a filing for bankruptcy. A private employer cannot fire or refuse to promote an employee because the employee has filed for bankruptcy.

Co-signers. If someone has co-signed a loan with the debtor who files for bankruptcy, the co-signer may have to pay the debt.

Debtors must be honest and list all their assets, debts, income and expenses. Failure to list an asset, like a personal injury lawsuit can result in the debtor losing that asset. In Re Yonikus 974 F.2d 901 (7th Cir. 1992).

The necessity for an attorney

Although it may be possible for some people to file a bankruptcy case without an attorney, it is not a step to be taken lightly. The process is complicated, and debtors may lose property or other rights if they do not know the law. It takes patience and careful preparation. Chapter 7, straight bankruptcy, cases are easier. Very few people have been able to successfully file Chapter 13, debt adjustment, cases on their own.

Credit counseling requirement

Within 180 days before filing a Chapter 7 or 13 bankruptcy, the debtor must receive a briefing from a nonprofit budget and credit counseling agency that has been approved by the United States trustee or bankruptcy administrator. This can be done the same day that the case is filed, as long as it is completed before the case is filed. Agencies must waive the fee for debtors who are unable to afford the fee. If an agency refuses to waive the fee and the debtor is very low income, the debtor should check with other approved agencies. There are many approved agencies. The briefing can be done by phone or on the internet and can be done relatively quickly, so the courts almost never waive the credit counseling requirement. After the case is filed debtors must also complete an instructional course on personal financial management to get a discharge.

Services to avoid

Document preparation services, also known as "typing services" or "paralegal services," involve non-lawyers who offer to prepare bankruptcy forms for a fee. Problems with these services often arise because non-lawyers cannot offer advice on bankruptcy cases and they offer no services once a bankruptcy case has begun. There are also debt settlement, consolidation, credit repair, and other disreputable scammers to beware of in this space.