The bankruptcy process is started by the filing of a Bankruptcy Petition. In a Chapter 7 Bankruptcy, the Court will assign a Bankruptcy Trustee and set a date for the First Meeting of Creditors. Notices will be sent to all Creditors listed in the Bankruptcy Schedules. The Debtor and his or her counsel appear before the Bankruptcy Trustee for the First Meeting of Creditors. Creditors are invited to attend as well. Generally, the Debtor is sworn in and the Bankruptcy Trustee asks various questions about the Bankruptcy Petition including whether or not it is a true and correct copy of the Bankruptcy Petition and Schedules, whether all assets have been included, all debts have been disclosed, and if the Petition, Schedules and other documents are complete and accurate. At the conclusion of the First Meeting of Creditors, the Trustee generally makes a determination of whether or not there are sufficient assets to gather and liquidate to pay creditors. If the Trustee determines that there are no such assets, he will file a report with the Court indicating such and shortly thereafter the Debtor will receive a discharge.
Reaffirmation Agreements – Debtors that desire to retain certain property may agree to reaffirm such debt. This is most often done when the Debtors desire to retain a home or automobile after the bankruptcy. Reaffirming a debt means that the Debtor signs and files with the court a legally enforceable document, which states that he promises to repay all or a portion of the debt that may otherwise have been discharged in his Bankruptcy case. Reaffirmation agreements must generally be filed with the court within 60 days after the first meeting of the creditors. Reaffirmation agreements are strictly voluntary B they are not required by the Bankruptcy Code or other state or federal law. Alternatively, a Debtor can voluntarily repay any debt instead of signing a reaffirmation agreement, but there may be valid reasons for wanting to reaffirm a particular debt such as retaining an automobile.
Reaffirmation agreements must not impose an undue burden on the Debtor or his dependents and must be in the Debtor=s best interest. A reaffirmation agreement, may be canceled at any time before the court issues a discharge order or within sixty (60) days after the reaffirmation agreement was filed with the court, whichever is later. If a Debtor reaffirms a debt and fails to make the payments required in the reaffirmation agreement, the creditor can take action against him to recover any property that was given as security for the loan and collect any remaining debt from the Debtor.
Debtors often chose not to reaffirm a debt but continue making payments. This is known as a Aride through@ and is beneficial when the Debtor wants to retain his home but does not want to be personally liable in the event, he cannot make payments at a future date. Although the Debtor may lose the home in a foreclosure if he stops making payments, the creditor will not be able to seek any additional payment from him or a deficiency judgment.
Exemptions – Bankruptcy does not mean that Debtors have to give up all of their property. Certain property is exempt and the Debtor may retain that property despite the bankruptcy filing. In Illinois the most common exemptions utilized are:
Homestead Exemption – this allows the Debtor to retain up to $15,000 equity in his home. This exemption is $30,000 if the filing is joint between a husband and wife who both reside in the residence and both are on title to the home.
Automobile Exemption – each Debtor is allowed to retain an automobile worth $2,400 or less or in the alternative retain equity in such amount.
Clothing – A Debtor may retain all reasonable and necessary wearing apparel.
Alimony, Maintenance and Child Support – A Debtor may retain all alimony, maintenance, and child support due to the Debtor and such amounts may not be garnished or levied upon.
Social Security Payments and Awards – A Debtor may retain any Social Security payments and awards and such amounts may not be garnished or levied upon.
Unemployment Compensation Benefits – A Debtor may retain any unemployment compensation benefits and such amounts may not be garnished or levied upon.
Life Insurance Benefits and Cash Value of Life Insurance Policies – A Debtor may retain such life insurance benefits if reasonably necessary for their support or that of dependent children. Furthermore, a Debtor may retain the cash value of any life insurance policy pursuant to which his or her spouse or children are beneficiaries and the policy is necessary for their support in the event of his or her death.
College Savings – College savings can be retained by the Debtor if they have been placed in certain college savings plans.
Retirement Funds – A Debtor’s interest in a pension, profit sharing, 401(k), or other qualified retirement plan is protected and can be retained by the Debtor.
Personal Injury Settlements and Awards – A Debtor can retain $15,000 from any personal injury award he receives or due him.
Workers’ Compensation Awards – A Debtor can retain 100% of any Workers= Compensation Award.
Proceeds from Exempt Property – A Debtor may retain any proceeds from property to the extent that such property is otherwise be exempt.
Other Property – A Debtor may retain up to $4,000 of other property that he may elect. This is most often used to protect a small bank account, household goods and furnishings, or even equity in an automobile that would otherwise not be exempt. Joint Debtors may aggregate this exemption allowing them up to $8,000 of other property that is jointly owned.
There are numerous other exemptions available to Debtors. Careful analysis of Debtor=s property is necessary to ensure all available exemptions are exercised.