Why You Don’t Want
to Go into Bankruptcy
CARE PROGRAM
This presentation will cover the following topics
• How we got to today’s bankruptcy system
• 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 (read 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
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 even more money
• You have to go through approved credit counseling before
filing.
– It’s a black mark on your credit report: 10 years
Key features of 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 by “discharging” old
debts, but . . .
Key features of Chapter 7
• There are some debts you don’t discharge
(more on that in a minute)
• “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
Key features of 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
Remember, bankruptcy can happen to anyone!
50 Cent
Toni
Braxton
Tia
Carrere
Larry
King
Abraham
Lincoln
Terri
Polo
Teresa
Giudice
Michael
Vick
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
For example, look at some of the
personal information Michael Vick had
to reveal in his bankruptcy
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 (see next slide)
– 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
family and friends
– 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