Why You Don’t Want
to Go into Bankruptcy
CARE PROGRAM
Overview
• Bankruptcy History
• Chapter 7 or Chapter 13?
• Exemptions
• Why there is no privacy in bankruptcy
• Non-dischargeable debts
• Bankruptcy hits your family and friends
Bankruptcy in history
• Before bankruptcy, there was debtor’s
prison: Charles Dickens
• Bankruptcy laws started in early 1840s
• Modern bankruptcy law started in 1898,
revised since then
• Credit card companies successfully
lobbied for bankruptcy law changes in
2005 to make bankruptcy tougher for
consumers
What do the following people have in
common?
Kim Basinger
Francis Ford Coppola
Tia Carrere and Mike Tyson
Larry King
Michael Vick and Mick
Fleetwood
What do these people have in common?
• They are all bankrupt.
• Kim Basinger paid $7,000 for pet care
and $9,000 for alimony - each month.
Michael Vick had 2 boats and a
$900,000 trust account for his dogs.
Mike Tyson paid $18,680 for clothing
and $2,778 for food each month. How
do we know these things?
No secrets in bankruptcy
• Bankruptcy laws require the consumer to
disclose everything the consumer owns,
everything the consumer owes, and all
sorts of payments for the years before
bankruptcy
Two main types of
consumer bankruptcy
• Chapter 7 and chapter 13
• Things that chapter 7 and chapter 13 have in common:
• You have to go through the court process. You have to
appear before a judge and report to a bankruptcy trustee
• For all practical purposes, you have to hire a lawyer. That
costs thousands of dollars.
• You have to go through approved credit counseling before
filing.
– It’s a black mark on your credit report: 10 years
Chapter 7
• You turn over all your assets except
“exempt assets” to a bankruptcy trustee.
• Bankruptcy trustee sells all your assets to
pay creditors.
• You get a “fresh start”
Chapter 7
• You can discharge many kinds of debts--but
there are some debts you don’t discharge
• “Discharge” means you are legally excused from
paying those debts--but credit reporting
agencies can still report this information
• After 2005 Bankruptcy Code changes, not
available for everyone. If your discretionary
income is too high, you are not allowed to file
chapter 7.
Look at the forms you have to
complete to show income calculation
Chapter 13
• You retain control of your assets.
• You must write a “plan” to repay your
debts over 3 to 5 years.
• The plan must channel all your income
other than necessary living expenses to
debt repayment.
• You get a broader discharge than in
chapter 7, but only if you complete your
plan.
Exemptions: in Illinois they are limited
• Technically, creditors and the trustee
cannot collect on exempt assets.
• But they can sell assets whose value
exceeds the exempt amount and give you
just the cash amount of the exemption.
Illinois Exemptions
• Home: $15,000
• 1 motor vehicle: $2400
• Life insurance, 401(k),
social security, certain
other retiree benefits
• School books, family
pictures, Bible, clothes
• Professional books and
tools of the trade: $1500
• Catch-all: $4,000
• Not much else
Why There is No Privacy in Bankruptcy
• Bankruptcy debtors have to reveal vast
amounts of detailed, intimate, sometimes
embarrassing information
• You sign under penalty of perjury
• It’s all public record
Look at this example of the
schedules that someone filed
Trustee makes the debtor answer questions in
front of creditors
• Trustees can take away jewelry, car keys
on the spot
• Creditors can make you answer questions
about your life for the last several years
You cannot discharge out of some debts
• For example:
– Student loans
– Luxury consumer debts over $500 within 90
days of bankruptcy
– Cash advances over $750 within 70 days of
bankruptcy
– Debts as a result of fraud
Student Loans
• Not dischargeable unless “UNDUE
HARDSHIP”
• Undue hardship is the present and future
inability to repay the debt and maintain a
minimal standard of living
• Only one percent of student loan debt gets
discharged based upon a showing of undue
hardship
And remember . . .
• A private employer is legally entitled to
turn you down for a job simply because
you filed for bankruptcy!
It can drag in your family and friends
• The bankruptcy trustee can sue these
people to give the trustee money
– Gifts within 2 years of bankruptcy, e.g., to
parents, friends, perhaps your church
– Paying off family debts within 1 year
of bankruptcy.
Conclusion
• Bankruptcy takes away your privacy
• Bankruptcy touches your family, friends,
and job
• Bankruptcy doesn’t protect you from all
your creditors
• Bankruptcy is expensive – financially and
emotionally
• Bankruptcy destroys your credit
Presentation of Chicago
CARE Program
Graphic Design:
Bonnie McDuffie