There’s two types of bankruptcies; there’s the chapter 7 bankruptcy which gives you a fresh start, and the chapter 13 which allows you to pay back a portion of your debt, sometimes 100 percent, sometimes as low as 10 percent, within three to five years.

In most cases, people prefer chapter seven bankruptcy. Basically chapter seven allows you to get rid of all your unsecured debt, that’s most of the time credit card, loans that were given out without getting a lien on anything, medical bills. Now, some things that actually do not go away in chapter seven are taxes that you owe the government and that were owed within the last three years, tickets such as parking tickets, those don’t go away, lawsuits that were filed against you for injury that was caused from drunk driving, and domestic support, child support also doesn’t go away.

Another thing that stays after chapter seven bankruptcy are liens that are on your property. So if there's a lien on your house and you choose to keep your house and not surrender it, you actually still have to pay those liens on the house, and any other assets such as a car that you want to reaffirm and keep after the bankruptcy you still have to pay that secured debt on those loans.

Now, in chapter seven you can keep your house even though there’s a lien on it. All you have to do is just keep making those payments on the house, and the same goes for a car that you want to keep. You can just keep making those payments and make a reaffirmation agreement, which is basically a contract saying that I will keep on being obligated for the payments on the car even after the bankruptcy. Now, you do have the option of surrendering the house and the car, but say for example if your mortgage is much more than the value of the house, you might want to actually choose to surrender your house since you can buy a similar kind of house for less value later on down the years. But some people, even though the mortgage may be more than the value of the house, might want to actually just keep it because it’s their own house and they have been living in it for some time.

Same goes for the car. You might owe much more for the car than the value of the car, you might want to actually choose to surrender it instead of reaffirming it and being obligated to make those payments even after bankruptcy. So, bankruptcy sometimes can give you a way out of a bad deal you might have gotten into yourself from buying a car or making other purchases that you still have installment payments on.

You also have an option of actually calling the financing company that maybe you took a purchased money security interest on your car, and actually negotiating with them telling them I will sign a reaffirmation agreement, but it has to be a little less than the amount that is owed to that financing company. That is also one of your options.

Now, when you file a chapter seven basically in a way you get a fresh start, but you must give up any equity, most of the equity that you have in assets. But you do get some exemptions and exemptions basically allow you to keep some of your property so after bankruptcy the debtors don’t just come out with absolutely nothing. So basically the Illinois actually opted out of the federal exemptions and you’re _____ to use the Illinois state exemptions.

The big ones are every person if you’re filing – if it’s a single filed bankruptcy and not joint, as in husband and wife, it’s a single, you get $15,000 for your house. So basically you have, if your mortgage is less than the value of your house by 15,000 the creditors can’t go after it and you can keep your house as long as you can make those payments. So an example that I can give you is if your mortgage is $185,000 and the value of your house is $200,000, well that difference of $15,000 is the equity and you have exemption of $15,000.

Now, realistically, can you have more? If the difference, if you have as much as maybe $20,000 in equity, most of the time the trustee’s not going to go after your house because the truth is there’s cost of selling your house, and even though you’re supposed to have only $15,000 of exemption of equity you actually have a little more cushion because the trustee is going to spend some money on actually the expenses of selling the house. So, in reality, even if you have 20,000, sometimes even $25,000 of equity, the trustee might not go after your house.

Now, if you are married you have 30,000 of exemption. Basically it’s the same principal, if you owe the bank $200,000 and your house is worth 230, you’re fine. You get to keep it. Nobody can go after it as long as you can make your payments.

Now, if your house is co-owned and you’re filing single bankruptcy, you have to take into consideration that the value that you owe is half of that house. So if you’re filing single bankruptcy, alone, and the house is co-owned by another person and the value of the house is $200,000, the value that you actually have is only $100,000. And if that mortgage is, let’s say, 180, you only, your only value is actually $100,000. So therefore if it’s co-owned a lot of times there’s not as much equity as it might appear in the beginning.

Now, most of the times chapter 7 is the best case scenario however there’s also chapter 13. Chapter 13 should be used when there’s a lot of equity in a house or some other kind of asset that a debtor is trying to protect. An example of this that we often see is a person comes in with a house that has a lot of equity in it. Well, a way to protect this is for you to file a chapter 13. If there’s more than $15,000 or in a joint case bankruptcy more than $30,000, then a trustee may actually go after your house. Now, by filing chapter 13 that stops the trustee or the creditors to going through your house and as long as you can make those payments for that mortgage and the arrears that you owe and might have missed on your mortgage payments prior to filing bankruptcy, you have to pay them back.

Now, the good thing about that is the mortgage company can keep calling you and forcing you to make those late payments right before you file, but once you file those late payments are stretched out over three to five years and you have time to actually pay those out. So if you did get in a bad situation, something where you lost your work for a couple of months, got sick, other circumstances unforeseeable might have happened, the bank might being trying to foreclose on you. Now, your option is just to file a bankruptcy chapter 13 and all of the sudden you have three to five years to pay back the amount that you owe, and of course you’ve to keep making your mortgage payments.

Now, this is one of the most often scenarios that are seen. Now, how much, if you do file chapter 13 some of that unsecured debt will be decreased. Now, the amount, in chapter 13 your unsecured debt don’t just get wiped out. You have to pay a portion of them, if not 100 percent. Now, how that is determined is in chapter 13 you’re going to be paying out a payment plan from three to five years. Now, how much of that debt is going to be paid out is determined by a formula. It’s either how much equity you have in all of your property, how much assets you have that’s actually owned by you and not by financial companies, that’s how much you’ve got to pay.

So, let’s say you have $30,000 of equity in your house, if you’re filing a chapter 13 you’re going to have to actually pay back at least $30,000 to these creditors. Now, kind of the reasoning behind this is kind of simple because the reasoning is if you have $30,000 in your house it’s either you’re going to sell it and give us the money, or you keep the house but you pay us back $30,000 within that three to five years. Now, even if you don’t have that much equity, there’s another formula that can be looked at and that is your income over your expense.

If you’re making a lot of income and you don’t have that much expense, the extra income that you make over your expense has to be paid out over that three to five years. And the reasoning behind that is also obvious, if you have extra income that’s coming in after your expense, then it should be paid out to the creditors. Now, one of the disadvantages of this kind of reasoning is in chapter 13 you don’t have the extra expense that you might have. For example, a family of three might have food expense of maybe $600 a month; however the Illinois state is going to give you the average food expense that should be used in that number. So in reality your expenses might be much more.

But in a bankruptcy they’re going to use standard expenses and then subtract those standard expenses from the income that you make, and that excess is going to be used to pay out the trustee and the creditors. The problem with this, as I said, is in reality you might have much more expenses and you might not have any more extra money afterwards, but that is not looked at and just the standards are actually used.

Now, another reason that a person might actually go into chapter 13 is involuntarily, and that is if he cannot qualify for chapter 7. Now, there are different tests to qualify for chapter seven, first a person – the easiest way to get into chapter seven is to be below the median income level. For a single person it is about $44,673 a year. Now, so if a person makes less than that in a year, he gets into a chapter seven and all he has to show is he has more expense than income and then he qualifies for chapter seven. If it’s a family of two people, it’s actually 56,545, if it’s a three person family it’s 66,607, and if it’s a four person family then the family has to make less than 77,634, and that is before taxes.

However, if the family makes more than that there is also the mean test. The mean test basically calculates how much money you make after your secured payments. So if you have a lot of mortgages out there, a couple of properties, you subtract those payments out from that income that you make, and if it is shown that after those secured debts are paid out you don’t make that much money, then you still could qualify for chapter seven.

In general, if a person makes much more money than 44,673 and he lives alone, the only way he can usually get into chapter seven is by showing he has secured payments made, such as properties he has to pay out. And of course you have to also show they have more expenses than income. Now, if you don’t qualify under this criteria you get pushed into chapter 13, and as we discuss chapter 13 portion your debt has to be paid out.

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Now, in chapter 13 you can also make some modification adjustments in chapter 7. You can modify the payments of your car, but – and some of the assets can also be modified. Now, when you are filing for bankruptcy, whether it be chapter 7 or chapter 13, leases and other things that are such as assets have to be listed. The trustee can actually seize the lease and use it or resell it to his advantage.

Some of the other criteria that you have to be aware of in chapter seven is that any payments made, large payments made within 90 days, the trustee might actually go after those payments. Also, any payments that you made to the relatives, the trustee may actually go after them within a year prior to bankruptcy. Therefore, it is not recommended to make large payments to your relatives a year prior to the bankruptcy filing.

Also in chapter seven one of things that has to be looked as is the assets that you have such as even in your bank accounts, any cash that you have in your bank accounts, checking accounts, stocks, securities, other kind of assets that can be claimed by the trustee. Now, one of the things that might happen is if you’re right about to file bankruptcy you might be facing some financial problems. One of the things that you might do is use that money in your checking account, for example if you have $10,000 in your checking account, you can actually use that money for living expenses. You can’t actually that money because you know you’re filing bankruptcy to buy yourself a diamond, but you can use that money for living expenses and just use that money for food, for payments, and that way your checking account will probably decrease from 10,000 to 0. And that way once you file for bankruptcy there probably won’t be the $10,000 in that checking account and it won’t be seized. Of course it does have to be used for regular or _____ living expenses.

Now, bankruptcy, a lot of people worry about filing bankruptcies. Bankruptcy is not the end of the world. It does stay on your credit report for ten years and you cannot file another chapter seven bankruptcy for another eight years. However, from six months to two years your credit history will start rebuilding itself. What you actually want to do once the bankruptcy goes through is you actually want to start using those credit cards, and you will get credit cards once you actually file for bankruptcy, even though they will have a high interest rate.

What you want to do is just take a small credit card and just use it. Constantly pay out whatever you borrow on that credit card. That way your credit history will keep improving and keep building, and within two years you might be able to get enough credit to actually buy a house.

Now, on a chapter 13, let me just talk about a chapter 13 just to review some more characteristics of chapter 13. The payments, as I said, is three to five years and it’s usually determined by seeing if you have extra income after expenses and the secured payments still have to be paid. Now, there is advantage to filing chapter 13. For example, the interest on the debt that you owe stops. So let’s say you owe $200,000 unsecured debt, in credit cards. Well, if the interest rate on that is 20 percent that’s going to be $40,000 every years, accumulating every year. Once you file a chapter 13 the interest stops and all you owe is $200,000 which has to be paid back in three to five years, determined by how much income you make.

You can usually extend it, but it’s hard sometimes if you’re forced to go into a 60 month period and pay for five years, you usually got to stay there. Now, in Illinois you can pay as little as 10 percent sometimes if you qualify for only 10 percent repayment plan in chapter 13, which is 10 percent of unsecured debt, which is a pretty good deal if you actually can get it. If you can show that you don’t have that much equity and that your income over expense isn’t that high.

Now remember, when you’re trying to save a house, chapter 13 may be your best option. By repaying those late payments that you still have to pay without the interest.

Now, let me just explain some of the procedures that happen in bankruptcy. Once bankruptcy is actually filed there is such a thing as automatic stay. Automatic stay starts upon filing, and basically what that does is that stops any creditor from in any way collecting debt. So if you’re getting those phone calls from creditors, once you actually file you’re not supposed to be getting them, and if you are just tell you have filed for bankruptcy and there is an automatic stay. And they actually do not have a right to actually be calling you, and that’s one of the benefits basically. Even your house mortgage company doesn’t have a right to be collecting it, unless they actually go for a foreclosure.

But usually, in chapter seven bankruptcy, if you actually choose to surrender your house, sometimes you don’t have to make the payments and you can still stay in the house sometimes for even a year. Because the bank that has the mortgage on your house still has to go through the foreclosure procedure which can take up to a year. Now, if you calculate that, a year of living in a house is pretty expensive so you are getting that free year to live in it, if you are of course surrendering it. And if you’re not, you still gotta make those payments and pay on that.

Now, the automatic stay is actually a unique feature because even if something happened after the automatic stay was there, such as somebody repossessed the car without bringing a motion to lift stay, that car, you can get it back from the creditor. So let’s say you filed your case, your case has been filed, and all of the sudden one of the creditors that has security on your car, purchased money security interest, comes in and repossesses your car, just takes it back.

Well, without of course having a motion for it, well that means you can go and get your car because what he did was actually illegal, and he actually can get punished for that. So, I think automatic stay has some benefits and one of the actual benefits is that it allows you to stay in your house for almost a year.

Now, let’s talk about taxes, taxes are a big thing and usually within three years, as I said, prior – taxes that were accumulated within three years prior to the bankruptcy won’t go away. However, if you file your taxes then you can actually get your taxes discharged that were there prior to three years. So, let’s say its 2008 right now. Taxes that you were supposed to pay in 2004, 2003, 2002, 2001, as long as you file them they can actually be discharged.

Now, I don’t know if you’re aware of this, but not paying your taxes can have significant consequences. For example, the interest rate can make your, can amplify actually the loan significantly. I mean in a couple of years you can go to actually doubling your loan. Now, once that bankruptcy is filed of course there is that no interest, but it’s not only that, it’s just that your taxes can get discharged is actually a big benefit in most cases.

Now, the next thing I want to talk about is business bankruptcies. There’s business and person, and a lot of people have small little businesses that went downhill and actually are bringing them along for the bankruptcy. Of course if you have an S corporation it’s a different kind of entity and it’s not totally connected to the owner. Therefore, let’s say a debtor has an S corporation, a body shop or a restaurant, whatever it is in order to actually discharge that debt, some of the liens that are from that S corporation, some of the credit cards that are on that S corporation, you actually have to file for the S corporations. However, most S corporations have also loans that are also secured by the debtors themselves, by the owners of the S corporations and not only by the S corporation, causing the owner of the S corporation and the S corporation to have to file bankruptcy together.

Most of the time lenders won’t give you a loan just for the S corporation knowing that you can easily just file bankruptcy under the S corporations without being liable for the rest of the loan. Therefore most of the loans are given to the owner of the S corporation and the corporation. In this scenario both the owner of the S corporation and the S corporation has to file bankruptcy and that’s the only way you’re going to get discharged from that debt.

Now, there’s also liens that are sometimes on your personal property that have to be looked at, and this is when it gets really complicated, especially when there’s co-owners on some of this property that you own personally and then there’s the liens that are on your business that’s also on your property. Now, a good idea to just keep things clear is to always have a business credit card, business accounts, and personal accounts. And if you don’t commingle with them it’s easy to keep them. And also when you’re taking out a business loan you really have to think of the consequences of bankruptcy, how it’s going to affect your personal life.

Unless you have a business that’s well developed and has a lot of assets in it, and your own personal equity, there’s no way that you can actually probably get a large loan without getting yourself liable for that loan because banks are not going to go for that risk. Therefore, whenever you put any secure loan with any of your personal property, understand the risk of bankruptcy. Understand the people that are co-owners of that property, make sure that they know that they might be actually losing their property if something ever happens to your business.

Knowing that entrepreneurialism is a very risky business you always want to keep that in mind. Especially when you’re just starting out a business it’s a good thing just to keep in mind is bankruptcy. I mean this is the way out of getting a company.

Of course if it’s not an S corporation, but just a personal business, then you do just file a personal bankruptcy as if it’s just your job, basically.

Now, the next thing that I actually want to talk about is ways that people attempt to save money within bankruptcy by getting rid of some of their assets they’re trying to protect. You must understand that some of these transactions that you’re making _____ are fraudulent. For example, selling your car that’s worth $10,000 for $1.00 to your brother within a year, not a year, but within a month, or even within a year they could say that fraudulent intentions. You were purposely giving away some of your properties.

I mean people try to just; they sell things for a cheap price. That will be seen. The trustee is going to look into that and might actually see that. Will they see it or not, will they get interested? I’m not for sure. As I said, as long as you keep everything fair and just use the money on regular living expenses, that’s fine. But you cannot actually go and spend some of this money on the luxury goods.

The other thing that’s out there is an offshore trust that you might have heard of. Basically these are just trusts in other countries and islands that basically the U.S. has no jurisdiction over them. However, the U.S. bankruptcy court now has laws and statutes that allow the trustee to go back into a trust that was made ten years prior to filling bankruptcy. So it’s 2008, so if you set up your trust in 2000, the trustee can order you to get that money from the off shore trust.

I mean prior cases there were debtors that actually tried to use an off shore trust to save thousands of dollars, or maybe even a million dollars just having an off shore trust and saying there’s no way we can get to that money because it’s in a trust and the ownership – basically a trust is set up that the ownership of property is within that trust and the trust is basically allowing the user to use the property. However, that has been changed and basically the U.S. laws now say that the trustee can go back ten years, to a trust that was set up ten years prior to filling bankruptcy and order the debtor to get that property from the trust.

There is also the state trusts that were made; states such as Delaware have these trusts that’s supposed to do the same function as these off shore trusts. However, there have been a lot of cases where the debtors were ordered to actually get the property out of that trust and just surrender it to the estate.

Now, I’m sorry, but I haven’t talked about the estate a little bit, just so you’re familiar. The estate is basically everything that the debtor has that’s not exempt, it goes into the estate. And then that’s, from the estate is what a trustee gets and he distributes that to all the creditors in a chapter seven. Another thing that people sometimes used to try to do is actually move into bigger states to get the bigger exemptions.

Now, in Illinois the federal exemption is opted out and all Illinois gets is the Illinois exemption. Some states have the federal or their state exemption and some states have more favorable exemptions than others. You might be favorable with the Florida state exemption that used to be that you could have a house, I believe OJ Simpson had a huge house in Florida and the reason for that is they have an exemption and they cannot take that house and it exempts any creditors from getting his house.

Now, the bankruptcy court I think has also taken stance against that in the statutes to kind of show that nowadays if you move I think the statute that applies to you for your exemption are the ones that have been there for 720 days. So whichever state you have been in within the last 720 days is the one that actually you have exemptions from. So unless you move to Florida and live there for more than 720 days, that’s the only way, you’re going to get the exemptions of Florida or any other state.

And I believe if you do move within a shorter period of time you get the state whichever – so if you move right now to Florida and stay there for a month, you still get the Illinois exemptions. So, basically some of these loopholes have been taken out of our system by now.