Frequently Asked Questions

When you file a bankruptcy case, all other litigation stops. Any assets that you have that are not exempt will be used to pay creditors. Creditors are entitled to be paid depending on whether they have a secured claim, priority rights to payment, or an unsecured claim.

Most individual cases are considered “no-asset” cases and most people keep whatever they have in Chapter 7 cases. People with assets can protect their assets and still file for bankruptcy under Chapter 13, or Chapter 11 for people with very large amounts of debt.

People and businesses may file bankruptcy under chapter 7, chapter 11, or chapter 13.

Chapter 7 is for people with low income and have few assets. Chapter 13 is for people with higher income or who have assets they want to protect. Chapter 11 is for businesses and for people with very high debts and reasonably high income. Subchapter V of Chapter 11 is for small businesses with less than $7.5 million in debt.

Most individual cases are considered “no-asset” cases and most people keep whatever they have in chapter 7 cases. People with assets can protect their assets and still file for bankruptcy under chapter 13, or chapter 11 for people with very large amounts of debt.

You qualify for bankruptcy under Chapter 7 if:

• Your income is less than the median income for people in your state; or
• You pass the “means test”; or
• Your debts are not primarily consumer debts; and
• Your case is not otherwise considered “abusive” because you have a lot of disposable income

As an individual or couple, you qualify for bankruptcy under Chapter 13 if:

• You have a regular source of income; and
• You have less than $2.75 million in debt

You can qualify for bankruptcy under Subchapter V of Chapter 11 if:

• You are a business or engaged in business; and
• Your debts are less than $7.5 million

Most businesses and persons may file for bankruptcy under Chapter 11, but Chapter 11 is complex and not for everyone or every business.

Even if you qualify for filing a bankruptcy case, you will have to confer with your attorney to determine whether bankruptcy works for you, whether you are entitled to a discharge in bankruptcy and the extent of the discharge to which you might be entitled, and which chapter of the Bankruptcy Code is right for you.

Some people file simple Chapter 7 bankruptcy cases on their own or “pro se”. However, bankruptcy is not simply filling in forms. You do need to know how to schedule assets and how to claim exemptions at the very least. Many people who file for bankruptcy on their own save a little in attorneys’ fees but lose a lot in terms of property.

As a bankruptcy attorney, I try not to do things for which I’m not qualified, like change the brakes on my car or do my own plumbing. The money you pay a qualified bankruptcy lawyer will save you a great deal of money in the long run. It will also save you from making potentially catastrophic mistakes.

At first, bankruptcy will have a bad effect on your credit score. Of course, your credit score may not be all that good before bankruptcy. Your credit report will show your bankruptcy for 10 years. However, after your bankruptcy discharge, your credit score will get better and making regular payment on debts that you reaffirm, like a mortgage or a car loan, will improve your credit score quickly.

Most debts can be discharged in bankruptcy, but there are many important exceptions. Some of these exemptions are:

• Income taxes that are less than 3 years old
• Even taxes more than 3 years old can’t be discharged if you did not file your tax return on time
• Taxes that you were supposed to pay for someone else, like sales taxes or withholding taxes
• Alimony, child support, including payments due to others like lawyers or court appointed guardians
• Property settlements from divorce can only be discharged in chapter 13
• Most money you owe governmental units
• Even if you get a discharge on a secured debt, the line securing that debt remains in place
• You may not be able to discharge a debt if someone sues you claiming that you did something to make that debt non-dischargeable. Reasons for this include:
  • Fraud
  • Embezzlement
  • Willful and intentional wrongful acts

We don’t want to file a bankruptcy case for you if your home, car, or other property is at risk. Illinois grants exemptions for many types of property. For example:

• 100% of your clothing
• $2,400 of equity in a car
• $15,000 of equity in a house ($30,000 for a married couple)
• Tenancy by the entirety ownership of a house is exempt from claims of creditors except those creditors who hold joint debts against both spouses
• 100% of your retirement funds are exempt if they are in the form of IRA, 401k, 403b, or similar sorts of accounts
• $1,500 in tools of trade
• 100% of a workers compensation claim
• $15,000 from any personal injury claim
• 85% of wages or other income from employment due you
• 100% of disability payments
• 100% of any general welfare benefits, including Earned Income Tax Credits and Child Care Credits

There are other exemptions for which you may qualify. We address these with you on a case-by-case basis.

If your property is fully exempt, you could consider filing a Chapter 7 case.

If your property is not fully exempt, you would consider filing a case under Chapter 13 or Chapter 11 if you are not eligible for a case under Chapter 13. We want to use bankruptcy in a way that allows you to protect your property but at the same time satisfy your debts.

At Lakelaw, we tailor the cost of your bankruptcy case to your situation.

In some types of cases, like Chapter 11 and Chapter 13, some of your fees can be paid after the case is filed. For Chapter 7 cases, you usually pay before the case is filed. But Chapter 7 costs less than Chapter 11 or Chapter 13. You can afford to pay your Chapter 7 fees much more than paying high interest rates on credit cards.

At Lakelaw, we will also let you pay us in installments for your Chapter 7 case before you file it. And in exceptional cases, we might let you pay some of your fees after the bankruptcy case is filed.

The question isn’t whether you can afford to file bankruptcy. The question really is whether you can afford not to file for bankruptcy. Our fees are competitive. You’ll get unparalleled personal attention as well as the benefit of decades of experience.

Your time in bankruptcy will vary depending on your type of case. The typical Chapter 7 case concludes within just a few months after the case is filed. If there are some assets to be administered in your Chapter 7 case, it may remain open for a while, but you’ll still get your discharge within a few months.

Your Chapter 13 case will remain pending for 3 to 5 years, depending on whether you make more or less than the “median income” for your state.

Chapter 11 cases are highly variable because each case is different. However, our bankruptcy lawyers at Lakelaw will be able to give you reasonable guidance about what you might expect in every case.

A debt is secured if there is some property standing behind the debt. For example, your house is security for a loan when you give a lender a mortgage on your house. Your car is security for a loan when you sign a retail installment sale contract at the time that you buy it. If you don’t pay a secured debt, the creditor has the right to take back the property you gave to secure the debt – we call that “collateral”.

An unsecured debt is a debt without any collateral. For example, virtually all credit card debt, all medical debt, student loans, utility bills, and personal loans are unsecured debt. In bankruptcy, all unsecured debts are treated equally although some unsecured debts, like child support, alimony, student loans, and recent tax obligations, are not discharged in bankruptcy even though they are unsecured.

No. Your obligation for the co-signed loan will be discharged, although the obligation of the other co-signer will remain in force.

In Chapter 7, the trustee determines if you have any assets or claims that can be turned into cash for creditors. If there are none, the trustee will file a no-asset report and your case will close soon. The trustee also will make sure you comply with your duties under the Bankruptcy Code.

In Chapter 13, the trustee determines if your plan complies with the Bankruptcy Code and makes recommendations about whether the plan is confirmed or not. You’ll make payments to the trustee and the trustee in turn will pay creditors their appropriate share.

In Subchapter V of Chapter 11, the trustee helps facilitate a plan and provides oversight in the case.

Foreclosures, repossessions, and wage garnishments are treated differently depending on the situation.

• Bankruptcy will temporarily stop a foreclosure if you file before the time of the foreclosure sale. This may be only temporary relief. But in Chapter 13, you have the chance to modify the mortgage or cure defaults over a period of years if you keep the mortgage current. You can also object to mortgage claims, if improper, in Chapter 13.
• Bankruptcy will stop repossession of your car. You’ll have to reaffirm the debt if you file in Chapter 7. You’ll have to keep the car insured and payments up to date. In Chapter 13, you’ll have time to catch up with payments if you’ve fallen behind, but you’ll still have to make your ongoing payments and keep the car insured.
• Bankruptcy will stop garnishments. You may be able to recover some garnishments that happened within 90 days before you filed your case.
• Bankruptcy will stop all collection activity. If it persists, we can sometimes recover damages and attorney fees.

Debt settlement sounds too good to be true because it is. It almost never works.

If you really want to pay your debts off over time, chapter 13 is usually a better idea. If you want to resolve your debts, pay off the highest interest-bearing debts first, cutting back on your expenses to do so. It will take you time, but it is possible in many instances.

We will help you budget and even negotiate with your creditors. If you can’t, then bankruptcy almost always is a better alternative.

A person is eligible to file a Chapter 7 case if they make less than the median income for a person in a household the size of the person intending to file. For an individual in Illinois, that amount presently is $67,102. That amount increases depending on the size of the Debtor’s household.

A person is also eligible to file a Chapter 7 case if they make more than the median income if their debts are mostly non-consumer debts (business debts or other debts not incurred for personal or household purposes).

Finally, a person may file a Chapter 7 case even if they make more than the median income if they pass the “means test”.

The “Means Test” is a formula devised in the Bankruptcy Code to determine if a person has sufficient disposable income to fund a payment plan under Chapter 13. This test considers certain allowances for various types of expenses and considers payments a person must make on secured claims. It also allows for consideration of special circumstances, such as unusual medical expenses, ongoing contributions to charity, and various other factors. If a person still has disposable income after calculations in the “means test”, then that disposable income must be used for a payment plan under Chapter 13 bankruptcy for a period of 5 years.

If all goes normally, the Chapter 7 process can start and finish in less than 120 days.

Most unsecured debts can be discharged in Chapter 7. These include:

• Credit card debt
• Payday loans
• Personal loans
• Medical debt
• Deficiency obligations for repossessed vehicles or other property
• Personal obligation on a secured debt like a mortgage or car loan – however the lien securing these obligations remains in force, even if the personal liability for the debt is discharged
• Personal obligation on a debt co-signed for another – however the co-signer remains liable on the debt
• Income tax debt more than 3 years old, provided the returns were filed on time

Some debts can never be discharged in Chapter 7. These debts include:

• Income tax debt less than 3 years old
• Tax debt that was supposed to have been paid for someone else such as sales tax or withholding tax (trust fund liability)
• Alimony, child support, and other domestic support obligations
• Debts owed to a former spouse under a marital settlement agreement
• Student loans absent a showing of “undue hardship”

Other types of debts may be determined to be non-dischargeable if the creditor files and wins a suit to determine dischargeability of debt. Reasons for such claims include:

• Fraud
• Embezzlement or defalcation
• Willful and malicious injury

You can eliminate some but not necessarily all tax debt. If you filed your tax returns on time, you could eliminate income tax debt that’s due if the date that the return was due was more than 3 years prior to the date of your bankruptcy.

Don’t make this decision yourself. Provide your lawyer with copies of official Internal Revenue transcripts to allow your lawyer to best determine whether your tax debt is dischargeable. The timing of your case can be critical.

You have a reasonable chance of keeping your home and car in Chapter 7.

You and your spouse are entitled to $15,000 exemptions to protect equity in your house. You may have maintained title to your house in tenancy by the entireties – this would protect your house against all claims except for joint debts against you and your spouse. There may be a mortgage on your house. The trustee would determine if there is equity after considering exemptions and liens. The trustee would also consider costs of liquidation such as real estate commissions, tax prorations, and other closing costs. If there is no equity for the creditors, your house would be safe.

The same analysis would apply to your car. You can have a $2,400 exemption for your car, twice that if the car is jointly owned with your spouse. You also can apply the “wild card” exemption of $4,000 to your car, twice that if the car is jointly owned with your spouse. Any sum you owe to a secured creditor would reduce equity in the car available for creditors. In most cases, there is no equity in a car for the trustee to liquidate.

If there is substantial equity in your house or car, we would counsel you to consider filing a Chapter 13 case to protect your property from liquidation.

The state of Illinois allows you to keep a fair amount of property in a Chapter 7 case. Here is a list of some of the most important exemptions:

• $4,000 of any personal property of any sort
• 100% of your necessary clothing
• 100% of your IRA, 401k, 403b, or other qualified retirement plan
• $2,400 of equity in one vehicle (double for jointly owned)
• $15,000 of equity in a residence (double for jointly owned)
• 100% of tenancy by the entireties property except to the extent that there are joint debts.
• $1,500 in tools of trade
• $15,000 in any personal injury claim
• 100% of any workers compensation claim
• 100% of any welfare or similar benefits, including Earned Income Tax Credit, Child Care Credit, Adoption Credit, Rental Relief Funds, Mortgage Relief Funds, COVID relief funds, and the like

If you have not lived in Illinois for the past 2 years, you still would be entitled to exemptions under the state you used to live in (if those exemptions apply to non-residents) or else Federal exemptions. The Federal exemptions are somewhat more generous than those granted in Illinois.

Bankruptcy remains on your credit report for 10 years. Initially, your credit score will decline considerably. Maintaining payments on existing secured debt or obtaining and paying on a secured credit card can have a positive impact on your credit score in a few years and sometimes less than that.

If the trustee decides to liquidate your property, you can usually convert to a Chapter 7 case if you disclosed the property in the first place. A conversion in bad faith might result in reconversion to Chapter 7 and loss of an asset that you failed to disclose. If in doubt, consider filing Chapter 13 in the first place.

There is a long list of tasks that a Chapter 7 trustee must do in Chapter 7. In general, the Chapter 7 trustee must ensure that you follow all the rules of Chapter 7, that you are eligible to be a debtor in chapter 7, to determine if you have any property that can be turned into cash for payment to unsecured creditors, to liquidate the property, and to close the estate as quickly as possible.

No. In almost all instances, your credit cards will be revoked immediately when you file any bankruptcy case. There are rare exceptions to this, but you should not expect this in your case. After your bankruptcy, it is often possible to get a new credit card, especially if you are willing to put up security to assure the payment of the new credit card.

It is possible that the notation of a prior Chapter 7 case on your credit report will result in increased costs of credit in the future. You probably won’t be able to get a mortgage for at least 2 years. Insurance may cost you more. In the long run, the relief you get from crushing debt is worth the short-term consequences.

Once you get a discharge in Chapter 7, you can’t get another discharge in Chapter 7 for 8 years from the date you filed the prior case. We don’t recommend that you make a habit of filing for Chapter 7.

In order to qualify for Chapter 13 bankruptcy:

1. You must have a regular source of income so that you can make regular monthly payments – typically in the same amount every month – during the term of the plan.
2. You must be an individual. Corporations, limited liability companies (LLCs), or partnerships are not eligible to file a Chapter 13 case.
3. Your total indebtedness, both secured and unsecured, must be less than $2,750,000.
4. You cannot get a discharge in Chapter 13 if you have had a prior discharge in Chapter 13 within the last 6 years.

You must pay all your “disposable income” toward payment of your debts during the “applicable commitment period.”

The applicable commitment period determines the time required by the Bankruptcy Code for debtors to remain in their Chapter 13 cases.

• If you make more than the median income, your plan must run for 5 years.
• If you make less than the median income, your plan period is only 3 years.

For people making more than the median income, we use the “means test” formula.

• We figure your average monthly income during the 6 months just before you file your case.
• From amount, we deduct taxes, actual amounts you spend on secured debt like your mortgage or car payment, and other allowances and actual expenses as permitted by the Bankruptcy Code.
• The “means test” tells us how much you must pay every month.

For people making less than the median income, we use your projected budget of income and expenses. The Chapter 13 trustee will want to verify the amounts you claim as your income and expenses.

Yes, you can! Remember, though, that you must pay at least as much in your Chapter 13 plan as creditors would get if you had filed a bankruptcy case under Chapter 7.

You can’t modify a mortgage on your residence in a Chapter 13 case. You can, however, eliminate a junior mortgage on your house if the first mortgage on your house is for an amount greater than your house is worth.

You can modify a car loan in a Chapter 13 case to a better interest rate if the car loan has been in effect for more than 910 days.

You can modify a mortgage on real estate that is not your residence in a Chapter 13 case in some instances. Every case is different. Let us know if you own real estate that is not your personal residence.

The following debts can be discharged in Chapter 13:

• All normal unsecured debts can be discharged in Chapter 13.
• All tax debts where the returns were filed on time more than 3 years prior to the Chapter 13 case can be discharged, but not taxes you were supposed to withhold or pay for others.
• Student loans can be discharged only if they give rise to “substantial hardship” as that term is defined by the courts.
• Unlike Chapter 7, property settlements arising from a divorce can be discharged in Chapter 13.

Debts that are not dischargeable in Chapter 7, like debts arising from fraud, embezzlement, or willful intentional acts, cannot be discharged in Chapter 13 either.

Like Chapter 7, a record of your Chapter 13 case will remain on your credit report for a period of 10 years. However, a successful Chapter 13 plan will be viewed as positive by many creditors and will likely help you reestablish your credit faster. Most people can get a mortgage within 2 years after their discharge. Most people can get at least a secured credit card very soon after their case has concluded.

There are 3 types of tax debts.

“Non-priority” debts are the taxes for periods more than 3 years prior to bankruptcy where you’ve filed your tax returns on time. These debts can be discharged in Chapter 13 just like any other unsecured debt.

“Priority” tax debts are claims that must be paid in full, frequently with interest, in the plan before any unsecured debts can be paid.

Tax liens are treated differently. They are broken down between the part that is secured and unsecured. The secured portion must be paid in full under the plan. The unsecured portion will be treated as any tax claim – either priority or non-priority as the case might be.

Your student loans will be treated like any other unsecured debt in Chapter 13. So, if you owe a great deal on your student loans, the lion’s share of your payments under Chapter 13 will go to the reduction of your student loans. In Chapter 13, your student loans won’t get discharged unless you file a complaint to do so and prove that payment of the student loan would be a “substantial hardship”. But you don’t have to pay your student loan off in full in a Chapter 13 case because it is not a priority debt. Most Chapter 13 trustees won’t let you pay your student loans in the ordinary course “outside the plan” at the rate you were paying before the Chapter 13 case because they won’t let you treat your student loan creditors in a preferential fashion.

Yes, you can convert a Chapter 13 case to a Chapter 7 case if things change, but you’ll have to establish that you were eligible to file a Chapter 7 at the time you filed your chapter 13 case. You also have the right to dismiss your Chapter 13 case. This may be helpful if you have only recently become eligible to file a Chapter 7 case.

If you can’t complete your Chapter 13 plan, you might be eligible for a hardship discharge. But if you can’t get this relief, you might have to convert your case to a case under Chapter 7 or dismiss the Chapter 13 case altogether. Every case is different, so it is difficult to generalize about this question.

Yes, you must attend. All such meetings are handled by Zoom now. So at least you don’t have to appear in-person at the Trustee’s office. The Trustee will ask you questions about your income and expenses. The Trustee will want to be sure that you are eligible to file a Chapter 13 case, that you are paying the right amount of money under your plan and that your plan is otherwise acceptable and confirmable.

If you filed Chapter 13 before and didn’t get a discharge, you can file again if you are not doing so in an abusive fashion. If you did get a discharge before, you can still file again, but not get a discharge for a period of 6 years from the date you filed the prior case in which you obtained a discharge.

Primarily designed for business reorganization, Chapter 11 can be filed by any individual, except banks and stockbrokers. There are 3 types of Chapter 11 cases: standard Chapter 11, “small business” Chapter 11, and Subchapter V Chapter 11. Each type has its own set of rules and processes. Chapter 11 may be suitable for individuals with substantial debts and irregular significant income, corporations looking to restructure their debts, or those desiring an orderly liquidation of their business assets.

In Chapter 11, debtors classify creditors as secured or unsecured, establish their priority, and identify insiders or subordinated ones. Debtors then prepare a Plan of Reorganization (POR) proposing payment amounts and terms for different classes of creditors, along with a Disclosure Statement containing sufficient information for creditors to decide on the plan. If all classes accept the plan and it complies with Chapter 11 provisions, the plan becomes binding even on dissenting creditors.

Under Chapter 11, the debtor remains in possession of its assets and manages its own affairs without the supervision of a bankruptcy trustee. As a Debtor-In-Possession (DIP), the debtor must act in the best interest of the bankruptcy estate, including the creditors, and comply with all requirements of the Bankruptcy Code. This includes maintaining a separate bank account, accounting for all post-petition transactions, keeping property insured, paying taxes, and obtaining court approval for transactions outside the ordinary course of business.

The Bankruptcy Code outlines various requirements for a Chapter 11 plan, which includes designating different classes of creditors, specifying treatment for impaired classes, demonstrating plan feasibility, and accounting for future income for individual debtors, among other provisions. The plan could also propose contract modifications, settlement of claims, or asset sales.

For a plan to be approved, it must be accepted by at least 2/3 in amount and a majority in number of creditors in a particular class. The plan must also comply with the Bankruptcy Code, be proposed in good faith, offer full disclosure of relationships, and be accepted by any governmental regulatory agency having jurisdiction.

Once your business completes its reorganization, it should have a clean bill of health. If you maintain agreements post-confirmation, you can establish and maintain a satisfactory credit rating.

The cost of Chapter 11 varies, and you will need to cover professional fees and costs such as attorneys’ fees, accountants’ fees, and United States Trustee quarterly fees. Your costs will be outlined at the case’s outset.

The duration of the Chapter 11 process varies significantly, with a number of factors influencing the timeframe. At Lakelaw, our approach emphasizes speed and initiative to ensure actions are presented to the court before any opposition to your plan can effectively organize. From our experience, a prolonged case tends to increase the chances of complications and failure. A streamlined “prepackaged” Chapter 11 bankruptcy can be concluded in weeks or months, while more contested or litigated cases may extend over months or even years.

Yes, debtors often sell or liquidate assets during Chapter 11. Many asset liquidation sales occur under Section 363 of the Bankruptcy Code with creditor approval. Purchasers can acquire assets free of liens, claims, and encumbrances. This process can be swift, and may incite competitive offers through a bidding process. Sales in Chapter 11 often maximize value for creditors and minimize financial liability for debtor owners. Some creditors may object, citing a lack of Chapter 11 plan protections, but if circumstances necessitate an immediate sale – or “exigent circumstances” – the Bankruptcy Court can approve an asset sale even without a formal Chapter 11 plan.

Creditors Committees are often established by the United States Trustee in substantial Chapter 11 cases. They represent the collective interest of unsecured creditors and can employ their own legal counsel, accountants, or financial advisors at the debtor’s expense. The committee can contribute to any case issue and often negotiates with the debtor to maximize unsecured creditor recovery. Debtor, Creditors Committee, bondholders, and secured creditors often find their interests at odds. At Lakelaw, we aim to balance these competing interests, often forming alliances with specific creditor classes to gain necessary concessions for a consensual plan. Creditors Committees are less likely to form in smaller cases.

Chapter 11 Trustees are rarely appointed and only when the court identifies serious issues like gross mismanagement or dishonesty by former management. In such cases, we might recommend employing a trusted Chief Restructuring Officer (CRO) to preempt Trustee appointment. If a Trustee is appointed, they will oversee your case, and have the authority to formulate a plan or liquidate your company. Our goal when representing your company in Chapter 11 is to avoid this outcome.

Yes, Chapter 11 allows for a wide range of negotiations, albeit the specific terms of your pre-existing agreements will impact your ability to do so. Counterparties often weigh the benefits of negotiating changes during a consensual reorganization against potential losses in liquidation.

Priority tax debts must be paid in full as part of a Chapter 11 plan, but non-priority tax debts can be discharged and treated like any unsecured creditor debt. However, it’s important to note that tax debts are often separately classified and addressed in Chapter 11 cases.

Chapter 11 can impact various stakeholders differently. For instance, specific rules govern how bankruptcy affects collective bargaining agreements. Vendors often continue their relationships with you, but should be aware that payments received in the 90 days prior to bankruptcy could be subject to “claw-back” claims as “preferences”. These claims might be pursued aggressively by Creditors Committees, especially if your reorganization fails.

Some vendors who you need ongoing relationships with might receive special payment consideration. Other stakeholders, including tort claimants, stockholders, bondholders, and more, may also be affected. As a “collective” proceeding, bankruptcy allows debtors to negotiate with each stakeholder class, demonstrating that concessions may serve their overall best interests.