The following are answers to frequently asked questions about bankruptcy in general and are not to be considered legal advice. While the information presented below is believed to be accurate it is not to be relied upon as legal authority or as a substitute for legal advice from an attorney.
It is highly recommended that you obtain legal advice from an attorney or legal association experienced in the practice of bankruptcy law.
GENERAL INFORMATION ABOUT BANKRUPTCY
What is bankruptcy?
Bankruptcy" refers to a federal code of laws and set of rules which are designed to help a debtor, whether an individual or a business, who is facing more debt than he, she, or it can afford to pay, achieve a fresh start. Bankruptcy permits the debtor to work out a plan to repay some or all of the debt, or to have some of the debt forgiven. The bankruptcy laws give the debtor protections and benefits that are not available outside of bankruptcy. Most notably, bankruptcy laws may provide for some debt forgiveness and typically require that creditors stop all collection efforts against the debtor while the debtor is working out a plan and/or awaiting a discharge of debts. The bankruptcy laws require that the debtor make full disclosure of all assets, liabilities and other financial information, and that the debtor either (1) surrender non-exempt assets for liquidation and distribution to creditors or (2) formulate and follow through on a plan of reorganization and debt repayment that provides creditors with at least as much as they would receive if the debtor's assets were liquidated and distributed to creditors. Bankruptcy cases are adjudicated by the bankruptcy court, a federal court which is a unit of the U.S. District Court in each jurisdiction.
Who can file a bankruptcy petition?
A bankruptcy case is commenced by the filing of a "bankruptcy petition," a formal request for relief under the bankruptcy laws. An individual, a partnership or a corporation (defined as including a qualifying business trust) may file a bankruptcy petition.
What is a joint petition?
A joint petition is the filing of a single bankruptcy petition by an individual and the individual's spouse. Only people who are married on the date they file the bankruptcy case may file a joint petition. Unmarried persons, corporations and partnerships do not qualify to file joint petitions. And, although married debtors may file a joint petition, they are not required to do so.
What are the different chapters in bankruptcy?
Chapter 7 is the liquidation chapter of the Bankruptcy Code. Chapter 7 cases may be filed by an individual, a corporation (defined as including a qualifying business trust) or a partnership. Under chapter 7, a trustee is appointed to collect and sell all property that is not fully encumbered by a lien and is not exempt and to use any proceeds to pay creditors. When the debtor is an individual, the debtor is allowed to claim certain property as exempt. The individual debtor usually receives a discharge, which means that he or she is relieved of the obligation to pay certain types of debts. Corporations and partnerships are not eligible to receive discharges.
Chapter 11 is the reorganization chapter available to businesses and individuals who have assets and/or income for use in restructuring and repaying their debts. Creditors vote on whether to accept or reject a plan of reorganization, which must be approved by the Bankruptcy Court. While the debtor typically remains in control of the assets, the Court, in some circumstances, can order the appointment of a trustee to run the business. In addition to the filing fee paid to the Clerk, the debtor must pay a quarterly fee to the U.S. Trustee based on the debtor’s revenues.
Chapter 13 is the debt repayment chapter for individuals (including those who operate businesses as sole proprietorships) who have regular income, whose secured debts do not exceed $871,550 and whose unsecured debts do not exceed $290,525. (Note that these debt limitations change from time to time.) Chapter 13 is not available to corporations or partnerships. Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future disposable income. The chapter 13 debtor proposes a repayment plan which must be approved by the Bankruptcy Court. The debtor pays the amounts set forth in the plan to the chapter 13 trustee, who distributes the funds to creditors in return for a small fee. The chapter 13 debtor receives a discharge of most debts after the debtor completes the payments required under the plan.
Will I lose all of my property if I file for bankruptcy?
Typically persons who file bankruptcy do not lose any property. This is because the vast majority of cases are “no asset” cases. This means that the value of the debtor’s assets are not enough to trigger the bankruptcy trustee to liquidate the assets to pay creditors.
Most people protect their assets by using exemptions. Exemptions in Illinois can protect equity in your home, your car and your personal property. There are additional exemptions for other types of assets, so be sure to completely disclose all property and claims (such as the right to sue someone) to your attorney.
Will my neighbors or employer find out about my bankruptcy?
Bankruptcy is a matter of public record, but typically no one finds out unless you tell them. If you have a garnishment at work, your employer will have to know, since you will need the bankruptcy to stop the garnishment.
Can I go to jail if I file bankruptcy or don't pay my debts?
No. There are no debtor's prisons in the United States.
Does the spouse of a married person also have to file bankruptcy?
No. In some cases where only one spouse has debts, or one spouse has debts that are not dischargeable then it might be advisable to have only one spouse file. If the spouses have joint debts, the fact that one spouse discharged the debt may show on the other spouses credit report.
Can I keep any credit cards?
Typically no. Most credit cards will summarily cancel your cards even if you have a zero balance on them.
Can I be fired from my job because I filed bankruptcy?
No. Section 525 of the bankruptcy code prohibits government units and private employers from discriminating against you because you filed a bankruptcy petition or because you failed to pay a dischargeable debt.
Can I be discriminated against in job hiring after bankruptcy?
Usually no. The bankruptcy law provides that you cannot be discriminated against for hiring in Federal jobs.
In Illinois, employers cannot ask about your credit history under the Employee Credit Privacy Act which puts your credit and credit report off limits except for a few categories of financially sensitive jobs such as:
Any bank or financial holding company, bank, savings bank, savings and loan association, credit union, trust company, or any subsidiary or affiliate of same;
Any authorized insurance or surety business, and those who act on behalf of a company engaged in the insurance or surety business;
Any state law enforcement or investigative units, such as the executive inspector general, state police, and departments of corrections, juvenile justice, and natural resources;
Any state or local government agency that requires use of an employee or applicant credit history or credit report; and
Any entity defined as a “debt collector” by federal or state statute.
Aside from those exceptions, your privacy should be secure in Illinois.
Who is a bankruptcy trustee? Who is the United StatesTrustee? What is the difference?
A bankruptcy trustee is a person appointed in all chapter 7 and 13 cases and in some chapter 11 cases. The trustee administers the bankruptcy estate and ensures that creditors get as much money as possible. The trustee also presides at the first meeting of creditors (also called the "section 341 meeting" because 11 U.S.C. ' 341 of the Bankruptcy Code requires that the meeting be held). In a chapter 7 case, the trustee liquidates the debtor’s assets by collecting and selling non-exempt estate property. In a chapter 13 case, the trustee collects money from the debtor and distributes it to creditors according to the debtor's repayment plan. The trustee can require the debtor to provide information and documents either before, after, or at the section 341 meeting. Debtors must cooperate with the trustee - failure to cooperate with the trustee is grounds for a denial of the debtor’s discharge.
Trustees are not necessarily lawyers, and they are not paid by the Bankruptcy Court. They are appointed by the United States Trustee. The trustees report to the Bankruptcy Court, but their fees are paid from the bankruptcy filing fees or, if the estate has assets, from the assets of the estate.
The United States Trustee's Office is part of the United States Department of Justice. It is completely separate from the Bankruptcy Court. The United States Trustee's Office is a watchdog agency, charged with monitoring all bankruptcies, appointing and supervising all trustees, and identifying fraud in bankruptcy cases.
What is the difference between a denial of discharge and a determination that a debt is non-dischargeable?
A denial of a discharge affects the debtor's entire discharge--and therefore all dischargeable debts – while a determination of nondischargeability affects only a particular debt. When a discharge is denied, the debtor gets no discharge at all and remains liable for the full repayment of all of his or her debts. The Bankruptcy Court can deny a debtor's discharge for various reasons, the most common being that the debtor failed to take the required financial management course; concealed property within one year prior to the bankruptcy or after the case is filed; made a false statement under oath in the bankruptcy case; presented or used a false claim; or refused to obey a lawful order of the court.
On the other hand, a determination of nondischargeability excepts only a particular debt from the discharge. If the Bankruptcy Court determines a particular debt is not dischargeable, then the debtor is obligated to pay that particular debt, but the remaining dischargeable debts are discharged.
What is the automatic stay?
Filing a bankruptcy petition "automatically stays" (stops) most collection actions against the debtor or the debtor's property. See section 362(a) of the Bankruptcy Code. The stay arises by operation of law and requires no judicial action. But there are several exceptions to this general stay listed in section 362(b) of the Bankruptcy Code. The most common exceptions are criminal proceedings, collection of certain alimony and child support obligations and governmental actions to protect the public. In addition, the automatic stay is temporary and will end as to the debtor when discharge is granted (at which time the discharge protects the debtor) or denied, when the case is dismissed or closed, or if the Bankruptcy Court grants a creditor or other party relief from the automatic stay for the reasons set forth in section 362(d) of the Bankruptcy Code. See also other limitations on the automatic stay set forth below. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even telephone calls demanding payments, without the approval of the bankruptcy court.
What is a discharge?
A bankruptcy discharge is a court order that relieves a debtor from personal liability for some specific types of debts. The discharge order permanently prohibits creditors from taking action to collect discharged debts from the debtor and, with very limited exceptions, against income and property that the debtor acquires after the bankruptcy filing. When a debt has been discharged, the creditor can no longer seek repayment. The discharge is the primary benefit most debtors obtain from bankruptcy. It is, however, important to understand that not all debts are dischargeable and creditors may still seek repayment for debts that are not discharged. Moreover, a debtor’s discharge may be denied or revoked.
Are all debts discharged in bankruptcy?
No. The following two categories of debts will generally not be discharged.
Secured Debts: The discharge does not affect a creditor's lien against collateral (e.g., a home mortgage or automobile loan), so it does not prevent a creditor who holds a lien from enforcing that lien after the automatic stay (discussed above) terminates or is lifted by the Court. In some cases, including with automobiles, unless the debtor reaffirms the secured debt or redeems the collateral, the secured creditor can seize the collateral, sell it, and use the proceeds to satisfy its claim. But this is all the secured creditor can do.
Unless the secured debt is also a nondischargeable debt (as discussed below), the discharge prohibits the secured creditor from collecting the balance (sometimes called a "deficiency claim") if the collateral is worth less than the claim.
Nondischargeable Debts: A discharge order does not apply to certain kinds of debts. These differ according to the chapter under which the bankruptcy petition is filed.
In a chapter 7 case, nineteen categories of debts are excepted from the discharge. See section 523(a) of the Bankruptcy Code for the full list. Most of these debts are automatically excepted from discharge, without the creditor having to take any action.
The most common of such nondischargeable debts are: many tax debts, alimony and child support obligations, as well as debts to a spouse or former spouse that arose from a divorce or separation agreement, court order or determination by a governmental agency, student loans, unless repayment would impose an undue hardship on the debtor or his or her dependents. Some debts are excepted from discharge only if the creditor timely files a separate complaint, called an adversary proceeding, objecting to the discharge of the debt and the Bankruptcy Court issues an order to that effect. These include: debts arising from fraud or false representations, debts for embezzlement, larceny, or the mishandling of funds that the debtor held as a trustee or fiduciary, debts for willful and malicious injury
In a chapter 13 case, the discharge available is slightly broader. Some of the debts not dischargeable in a chapter 7 case may be dischargeable in a chapter 13 case. See section 1328(a) of the Bankruptcy Code for comparison to section 523(a) of the Code.
Is a discharge guaranteed/automatic or may interested parties, including creditors, object to the discharge?
In chapter 7 cases, the debtor does not have an absolute right to a discharge. An objection to the debtor’s discharge may be filed by a creditor, by the trustee in the case, or by the United States Trustee. Creditors receive a notice shortly after the case is filed that sets forth important information, including the deadline for objecting to the discharge. In order to object to a debtor’s discharge, a creditor must file a complaint called an adversary proceeding before the deadline set out in the notice. Once the deadline to object to a debtor’s discharge passes, and if no objections have been filed, the Bankruptcy Court will grant the chapter 7 debtor his or her discharge. This will typically occur approximately three months after the meeting of the creditors, which is approximately four months after the debtor files the bankruptcy petition.
The Bankruptcy Court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to complete a course on personal financial management; failure to cooperate with the Trustee’s investigation of pre-petition financial affairs; concealment of property within one year prior to the bankruptcy or after the case is filed; making of a false statement under oath in the bankruptcy case; presentation or use of a false claim; or refusal to obey a lawful order of the court.
In chapter 13 case, the debtor is usually entitled to a discharge upon completion of payments under the plan. Most plans take between three to five years to complete, so that is also about how long the chapter 13 debtor will wait for the discharge order. As in chapter 7, a discharge may not occur in a chapter 13 case if the debtor fails to complete a required course on personal financial management. A debtor is also ineligible for a discharge in chapters 7 and 13 if he or she received a prior discharge in another case commenced within the time frames discussed below.
How does a creditor obtain relief from the automatic stay?
The automatic stay, even when applicable, is of limited duration (see discussion above). If a creditor desires to take any action covered by the automatic stay prior to its termination, such as foreclosing on a mortgage or pursuing a lawsuit against a debtor, a creditor must file a motion for relief from the automatic stay. The grounds for granting relief are set forth in section 362(d) of the Bankruptcy Code.
A company or individual has filed for bankruptcy and owes me money. What do I do?
In most cases, the creditor needs to file a proof of claim, but the answer depends on many factors, including what chapter the debtor selected for the bankruptcy case. A creditor should consult an attorney about how best to protect his, her, or its interests. It is also important to remember that there are often strict deadlines for filing a proof of claim. (See discussion above.) A proof of claim form may be obtained from any Clerk's Office location, or it may be downloaded from this website Proof of Claim. Copies of documentation supporting the claim should be attached to the proof of claim.
The trustee assigned to the case will be able to answer questions regarding the time when a dividend on a claim will be paid. The trustee's name and telephone number are on the section 341 meeting of creditors notice.
I am a creditor in a case that has converted to another chapter. Is it necessary for me to file another Proof of Claim?
No. Once a proof of claim has been filed with the Bankruptcy Court, a creditor does not need to re-file proof of that claim after conversion of the case to another chapter.
I am a creditor in a chapter 7 asset case. How long before I can expect a dividend payment?
There is no simple answer to that question. The length of time before a dividend is received depends on the circumstances of the individual case because assets must be liquidated and claims evaluated prior to distribution. Creditors should contact the chapter 7 trustee and inquire when he or she expects to issue checks to creditors. The chapter 7 trustee's name and telephone number are on the notice of the section 341 meeting of creditors.
I have received a Notice and Summary of the chapter 7 trustee's Final Report and Account. How long will it be before I receive payment on my claim?
Once the trustee has filed his or her Final Report and Account, the Bankruptcy Court must hold the Report and Account for possible objections and, if an objection is filed, may hold a hearing on it. The trustee cannot distribute the funds to creditors until the objection is resolved. Typically, the trustee will distribute money to creditors approximately six to eight weeks after creditors receive the Notice and Summary of the Trustee's Final Report and Account, but the period may be longer. Further questions should be directed to the chapter 7 trustee, whose name and telephone number are on the notice of the section 341 meeting of creditors.
I am a creditor in a Chapter 11 case and the Plan of Reorganization has been approved. When will I receive a check?
The answer to this questions varies from case to case, depending on the terms of the Plan of Reorganization. The attorney for the debtor-in-possession or the chapter 11 trustee should be contacted for information regarding payments under a confirmed plan.
What is a domestic support creditor?
A domestic support creditor is a spouse, former spouse, child of the debtor, or such child’s parent, legal guardian or responsible relative or governmental unit to whom a debt is owed before, on, or after the date of the order for relief in the nature of alimony, maintenance or support or an obligation arising from a separation agreement, court order or government determination. Domestic support obligations are excepted from discharge in chapter 7 and to a more limited extent in chapter 13.
If there is a claim for a domestic support obligation in a case, it is now the responsibility of the chapter 7 or chapter 13 trustee to provide written notice to: (1) the holder of the claim, and (2) the applicable State Child Support Enforcement Agency. A notice is required both at the time of filing and at the time of discharge.
I am a child support creditor. How can I determine whether my child support debt is nondischargeable?
Child support debts are excepted from discharge. If the nondischargeability of the debt is disputed by the debtor, the child support creditor may file an adversary proceeding to have the Bankruptcy Court determine whether the debt is, in fact, nondischargeable.
My ex-spouse has filed bankruptcy. He/she has listed me as a co-signer on a scheduled debt. What can I do? Does my divorce decree protect me?
If liable with a former spouse/debtor on a debt, the non-debtor former spouse should seek competent legal advice for a thorough explanation of his or her rights and obligations in this area as soon as he or she learns that the ex-spouse has filed a bankruptcy petition.
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