Why Can’t I Get Rid of This Debt?

It’s no secret that people have a lot of trouble paying down their credit cards. Take me for example. I got a credit card in my early twenties (I won’t say which one, but it starts with an ‘A’, and ends with a ‘merican Express’.) That zero percent interest rate sounded great, and for the first few months everything was just fine. I made my payments on time, and was on my way to establishing good credit. Then, I somehow missed a payment. Perhaps my finances were tight that month, or I just misplaced the bill. The reason didn’t matter to my credit card company though. They started charging me thirty (that’s 30) percent interest and soon, what had been a measly $500.00 debt was over $3600.00.

Now, I’ll accept the blame for missing the payment, and when I went back and checked the contract, sure enough, miss a payment and get the interest rate jacked up. As a young man who was still trying to find his way in life, I tried to make the minimum payments, but I soon found that by making those minimum payments I would never actually pay down the debt to zero, or at least I wouldn’t before I was fifty years old.

About this time I started practicing as a bankruptcy attorney, and I discovered something. I was not the only one in this sort of situation. All my clients were too! All across the spectrum, from police officers to construction workers to office managers to salespeople, everyone was being crushed by the interest rates on their credit cards. I was one of the lucky ones with only one card to worry about, but imagine that same problem with three, four or five credit cards, all with thirty percent interest! It’s outrageous! And then, there were the people who thought at the very least they could reduce the number of credit cards and make their debt more manageable. They paid off one card with another, and their installments were still too high to make more than the minimum monthly payment.

The madness has to end sometime though. People are smart, and we will all eventually realize when we’re in over our heads. That’s when it’s time to seek help. And please, whatever you do, don’t seek help from a ‘Debt Consolidation Agency.’ First of all, there is nothing anywhere that says that all your creditors have to go along with the repayment plan. They can opt out, and still be waiting for you in the end, with all the interest that you’ve accrued. Second, Debt Consolidation Agencies can take up to Forty percent of what you pay them every month as service and administrative fees. That means that for every $100.00 you pay them, only $60 is actually going to pay back your debt. Not a good deal at all.

So, talk to a professional. If your debt is more than you can manage, perhaps it’s time to give yourself a fresh start, or at least work out a repayment plan with the full power of the law behind it. Contact an specialized attorney and find out if bankruptcy is right for you.

Until then, keep your eyes on the prize.

What to Expect in Bankruptcy Court

Many of my bankruptcy clients would be very anxious about having to “go to court” during their bankruptcy proceeding. Most of these fears were based on misconceptions and horror stories that simply aren’t true.

In a typical bankruptcy case, you don’t ever actually see the bankruptcy judge or “go to court”, you simply meet with a court appointed trustee at a “341 Meeting of the Creditors”, named after section 341 of the bankruptcy code. The trustee’s job it is to oversee the bankruptcy process and represent your unsecured creditors.

Your Meeting of the Creditors will typically take place 30-45 days after the bankruptcy is filed. In the majority of bankruptcies, these meetings are relatively simple and painless for the debtor and most meetings in a Chapter 7 bankruptcy last as little as 5-10 minutes. In a Chapter 13 bankruptcy , the trustee also has to go over your budget to ensure that the proposed payment plan is feasible, so they can take a little longer to complete, but usually aren’t more than 20 minutes.

The trustee will swear you in under oath, ask some questions to make sure that you are eligible to file bankruptcy, verify your social security number, and examine your bankruptcy schedules for any irregularities. If you hired an experienced bankruptcy attorney to prepare your paperwork and fully disclosed all relevant information, then there shouldn’t be any surprises. Each State has exemptions that allow you to protect all or a portion of your assets and the majority of bankruptcy cases end in a finding of “No-Assets”, meaning that all of your property is protected from your creditors.

Although it is referred to as the “Meeting of the Creditors”, it is unlikely that any of your creditors will actually attend the Meeting. Sometimes your secured creditors will attend the Meeting to offer a Reaffirmation Agreement on your secured debts. By signing a reaffirmation agreement, you are able to keep any property that you pledged as collateral for the loan by agreeing to repay the debt even though you’ve filed bankruptcy. You’re under no obligation to reaffirm any debts, and you should consult with your bankruptcy attorney before signing any reaffirmation agreements.

Many clients ask “Was that it?” after the completion of their Meeting and can’t believe how dignified and simple “going to bankruptcy court” was.

Illinois Chapter 7 Bankruptcy Options When You Have Excess Equity in Real Estate

A common scenario that we as bankruptcy attorneys often see in personal Chapter 7 bankruptcies is when our clients have equity in their real estate in excess of the Illinois homestead exemption. In Illinois, a Chapter 7 bankruptcy filer is allowed to protect, keep and exempt up to $15,000 of equity in their homestead property, and the exemption doubles to $30,000 for married joint filers.  To qualify for this Illinois “homestead” exemption, you generally must be able to show that you lived in the property in question at the time of the Chapter 7 bankruptcy filing.

Real estate equity is determined by taking the real estate’s fair market value and then subtracting a reasonable cost of sale percentage in addition to any liens that exist on the property.  The Northern, Central and Southern Districts of the Illinois Bankruptcy Courts all generally accept a 7% cost of sale reduction to account for any broker fees, real estate taxes, etc. at the time of sale.   So in an example where an unmarried person owns a homestead property worth $200,000 that has a $120,000 mortgage on it (and no other liens), the formula would look like this: $200,000 – 7% cost of sale = $186,000 – $120,000 mortgage = $66,000 – $15,000 homestead exemption = $51,000 of exposed equity.

Many options exist for bankruptcy clients who have equity in their home in excess of the Illinois homestead exemption:

1) Consider Filing a Chapter 13 Bankruptcy
Typically the most advisable and best option given by bankruptcy attorneys to clients who need the relief of the bankruptcy code but at the same time want to keep their home is to file a Chapter 13 bankruptcy.  In a Chapter 13 bankruptcy, the filer is allowed to repay the equivalent amount of excess equity that’s unprotected by the homestead exemption and therefore keep their home.  Chapter 13 bankruptcies are consolidation repayment plans that are based on a filer’s household disposable income and will range anywhere from 3 years at a minimum to 5 years at a maximum.   To be able to qualify for a Chapter 13 bankruptcy, a filer must demonstrate that they have the sufficient, steady monthly income to support a feasible repayment plan based on their subjective circumstances.

2) Selling the Real Estate Prior to Filing
The Illinois homestead proceeds of sale exemption allows a Chapter 7 filer to keep up to $15,000 in proceeds of sale of a homestead that has been sold within one calendar year prior to the filing of the Chapter 7 bankruptcy.  This exemption also doubles to $30,000 for joint filers.   While it makes most sense for those who are willing to part with their home, this option can be extremely beneficial in that allows qualified Chapter 7 bankruptcy filers to receive a discharge on their unsecured debt, and at the same time retain the cash equity from the sale of their former home in a Chapter 7 bankruptcy filing.  Note: It’s important to remember to not commingle any of the sale proceeds with your general funds in this scenario.

3) Surrendering the Real Estate to the Bankruptcy Court
Another option is to file a Chapter 7 bankruptcy knowing that excess equity in the homestead exists, and allow the Chapter 7 Trustee to sell and liquidate the real estate.  In this scenario, the Chapter 7 Trustee will pay the individual filer their $15,000 proceeds of sale exemption ($30,000 for married filers) out of the equity from the sale.  Any funds gained from the sale of the property in excess of the exemption will be used by the Chapter 7 Trustee to repay the Chapter 7 filer’s creditors.

4) Chapter 7 Trustee Buyout
This option allows a Chapter 7 bankruptcy filer to keep their property, but at a literal cost.  A Chapter 7 filer must produce matching cash funds to cover the equivalent monies that a Chapter 7 Trustee would receive if they sold and liquidated their homestead in a Chapter 7 bankruptcy.   This large cash amount is usually obtained by Chapter 7 filers refinancing the equity out of the property and turning the proceeds over to the Chapter 7 Trustee.  However, this option can be risky and is not usually advisable in that it can often be difficult to qualify for real estate refinancing after the filing of a Chapter 7.

Illinois Chapter 7 Bankruptcy Options When You Have Excess Equity in Real Estate

A common scenario that we as bankruptcy attorneys often see in personal Chapter 7 bankruptcies is when our clients have equity in their real estate in excess of the Illinois homestead exemption. In Illinois, a Chapter 7 bankruptcy filer is allowed to protect, keep and exempt up to $15,000 of equity in their homestead property, and the exemption doubles to $30,000 for married joint filers.  To qualify for this Illinois “homestead” exemption, you generally must be able to show that you lived in the property in question at the time of the Chapter 7 bankruptcy filing.

Real estate equity is determined by taking the real estate’s fair market value and then subtracting a reasonable cost of sale percentage in addition to any liens that exist on the property.  The Northern, Central and Southern Districts of the Illinois Bankruptcy Courts all generally accept a 7% cost of sale reduction to account for any broker fees, real estate taxes, etc. at the time of sale.   So in an example where an unmarried person owns a homestead property worth $200,000 that has a $120,000 mortgage on it (and no other liens), the formula would look like this: $200,000 – 7% cost of sale = $186,000 – $120,000 mortgage = $66,000 – $15,000 homestead exemption = $51,000 of exposed equity.

Many options exist for bankruptcy clients who have equity in their home in excess of the Illinois homestead exemption:

1) Consider Filing a Chapter 13 Bankruptcy
Typically the most advisable and best option given by bankruptcy attorneys to clients who need the relief of the bankruptcy code but at the same time want to keep their home is to file a Chapter 13 bankruptcy.  In a Chapter 13 bankruptcy, the filer is allowed to repay the equivalent amount of excess equity that’s unprotected by the homestead exemption and therefore keep their home.  Chapter 13 bankruptcies are consolidation repayment plans that are based on a filer’s household disposable income and will range anywhere from 3 years at a minimum to 5 years at a maximum.   To be able to qualify for a Chapter 13 bankruptcy, a filer must demonstrate that they have the sufficient, steady monthly income to support a feasible repayment plan based on their subjective circumstances.

2) Selling the Real Estate Prior to Filing
The Illinois homestead proceeds of sale exemption allows a Chapter 7 filer to keep up to $15,000 in proceeds of sale of a homestead that has been sold within one calendar year prior to the filing of the Chapter 7 bankruptcy.  This exemption also doubles to $30,000 for joint filers.   While it makes most sense for those who are willing to part with their home, this option can be extremely beneficial in that allows qualified Chapter 7 bankruptcy filers to receive a discharge on their unsecured debt, and at the same time retain the cash equity from the sale of their former home in a Chapter 7 bankruptcy filing.  Note: It’s important to remember to not commingle any of the sale proceeds with your general funds in this scenario.

3) Surrendering the Real Estate to the Bankruptcy Court
Another option is to file a Chapter 7 bankruptcy knowing that excess equity in the homestead exists, and allow the Chapter 7 Trustee to sell and liquidate the real estate.  In this scenario, the Chapter 7 Trustee will pay the individual filer their $15,000 proceeds of sale exemption ($30,000 for married filers) out of the equity from the sale.  Any funds gained from the sale of the property in excess of the exemption will be used by the Chapter 7 Trustee to repay the Chapter 7 filer’s creditors.

4) Chapter 7 Trustee Buyout
This option allows a Chapter 7 bankruptcy filer to keep their property, but at a literal cost.  A Chapter 7 filer must produce matching cash funds to cover the equivalent monies that a Chapter 7 Trustee would receive if they sold and liquidated their homestead in a Chapter 7 bankruptcy.   This large cash amount is usually obtained by Chapter 7 filers refinancing the equity out of the property and turning the proceeds over to the Chapter 7 Trustee.  However, this option can be risky and is not usually advisable in that it can often be difficult to qualify for real estate refinancing after the filing of a Chapter 7.

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