Bankruptcy Archives - Dickson Law Group, LLC

Should you file bankruptcy? How to decide.

January 21, 2020 By John P. Dickson

When bills start to pile up, you make think about filing bankruptcy. Should you?

If you’ve arrived at this page, you’re seriously thinking about filing bankruptcy. Bills are piling up, collection agencies are calling, you can’t sleep because you are worried that your car will be repossessed in the middle of the night. It is a stressful time to make one of the most important decisions of your adult life. How do you decide whether to file bankruptcy? Here is the process I work through with my clients.

Step 1: Can filing bankruptcy help you?

I will explain the different types of bankruptcy below, but for now understand that the basic deal with filing bankruptcy is that all of your debts that can be discharged will be eliminated (“discharged” in legal speak) if you do certain things. If your debts are discharged after you file bankruptcy, your creditors can no longer come after you to repay them for the discharged debt.

But not all debts are discharged. For example, filing bankruptcy cannot discharge the following debts (among others, and there is a long list of less-common debts that cannot be discharged by filing bankruptcy):

Child support
Alimony (which is now called “spousal maintenance” in Illinois)
Student loan debt
Most unpaid taxes (here’s a more in depth discussion about what tax debts can be discharged in bankruptcy)
Debt you owe because you borrowed against certain retirement plans
Court fines and penalties
Debts for money that you stole

In addition to debts that cannot be discharged, there is something closely related to debt that typically cannot be eliminated in bankruptcy called a “security instrument.” Some loans–typically mortgages and car loans–have not only a promissory note (your promise to repay the bank) but also a security instrument or mortgage. The security instrument or mortgage allows the bank to take the car or house that secured the loan to recover what it’s owed. While filing bankruptcy prevents the bank from squeezing money out of you personally, it can take and sell your house or car if you pledged it as collateral for the loan.

Step 2: Is filing bankruptcy worth it?

In order to understand whether filing bankruptcy is worth it to you, you have to first understand the different types of bankruptcy and what the trade-offs are when you file bankruptcy.

The bankruptcy code is divided into “chapters.” The bankruptcy law is a long law, and like long books, chapters help the reader navigate the document. Four chapters of the bankruptcy code set forth four types of bankruptcy relief that is available to consumer debtors:

Chapter 7: this is what most people think of when they think about filing bankruptcy. This is the liquidation chapter, and is sometimes referred to as “straight bankruptcy.” The deal here is if you you are eligible to file it, you give up all of your “non-exempt assets” (I’ll explain what your exemptions are in a moment) and in exchange all of your debts that can be discharged will be discharged. About 95% of bankruptcies filed by individuals in the Northern District of Illinois (which is the name of the court that presides over the northern third of the state) are what’s known as “no-asset bankruptcies” where the debtor’s exemptions prevent any property from being turned over to creditors. What that means is that most people reading this will not have to give up anything to file Chapter 7 bankruptcy.
Chapter 13: this is the primary “repayment” or “wage earner’s” bankruptcy chapter. The deal when you file Chapter 13 bankruptcy is that if you pay all or some (depending on how much you owe to whom) of your “disposable income” over three to five years, all of your remaining debts at the end of your plan will be discharged. Because Chapter 13 requires you to pay money over a long period of time and Chapter 7 doesn’t, Chapter 7 is typically a better option for most debtors and the only people who would prefer Chapter 13 to Chapter 7 are people who need to file bankruptcy to save their house (because you can restructure your mortgage payments in a Chapter 13 plan), people who make too much money to qualify for Chapter 7 bankruptcy, or people who need to do some of the other special things you can do by filing Chapter 13 bankruptcy (like stripping unsecured liens off your house).
Chapter 12: this is a chapter that only applies to family farmers and fishermen, so they don’t have to sell the tractor or boat to file bankruptcy.
Chapter 11: this chapter is similar to Chapter 13, except that it is less friendly to you than Chapter 13. The only reason why an individual would file Chapter 11 bankruptcy is because they have a ton of unsecured debt (more than $300,000 or so in credit card or medical bills) and/or a ton of secured debt (more than $1 million in mortgage or car loan debt).

Chapter 7 is probably not worth it if your non-exempt property is worth more than your debts. There are lots of exemptions in Illinois for property when you file bankruptcy, but the most common are that you can exempt:

$4,000 for any property you want (and it could be a pile of cash up to $4,000–literally any property you want that you own and is not used to secure debts)
$2,400 in equity in any one motor vehicle.
$1,500 of the tools of your trade.

What this means is that if you own a small business and have lots of expensive tools, equipment, or inventory, you should not file Chapter 7 bankruptcy unless you are willing to give most of it away to your creditors. Similarly, if you have a car or cars that are paid off, you should not file Chapter 7 bankruptcy unless you are willing to lose them in bankruptcy. If you have toys that can easily be sold–guns, artwork, jewelry, boats, ATVs, etc.–you should not file Chapter 7 bankruptcy unless you are willing to lose your toys in bankruptcy.

Step 3: Are there alternatives to filing bankruptcy?

Bankruptcy is not the end of the world, but it should be a last resort. How sure are you that you need to file bankruptcy to deal with your debts? It makes sense to talk to a free consumer credit counseling agency before talking to a bankruptcy attorney like me. If you live in McHenry County, Illinois, or Kane County, Illinois or Lake County, Illinois, you really should talk to Consumer Credit Counseling Service of Northern Illinois before committing to filing bankruptcy. CCCS is free, non-profit, and most importantly, I trust them because they do good work.

Step 4: Make an appointment with me to discuss how to file bankruptcy.

If you still think you should file bankruptcy, and if you live reasonably close to Crystal Lake, Illinois, give me a call at 815-317-5193. I will talk you through your issues over the phone, and we can schedule a free consultation about whether filing bankruptcy is right for you.

Types of bankruptcy relief available

October 18, 2016 By John P. Dickson

“Chapter” refers to the different types of relief available.

Crystal Lake bankruptcy attorney Dickson Law Group 815-317-5193

When you open your wallet, are the people on the bills frowning at you? Contact Dickson Law Group for a Crystal Lake bankruptcy attorney who can assist you with changing your financial outlook.

So, you’ve decided to file bankruptcy. You do not technically need a bankruptcy attorney to file bankruptcy. You conceivable could file your own bankruptcy petition, and there is such a thing as a professional bankruptcy petition preparer who can draft the documents for you.

Bankruptcy, however, is complicated and the paperwork is extensive. The most recent bankruptcy petition I filed contained 61 pages of documents for the petition alone, without counting all of the other documents that are filed with a bankruptcy case. A bankruptcy lawyer can also give you legal advice that a professional petition preparer cannot.

There are four types of relief available to consumer debtors under the United States Bankruptcy Code. These types of relief are generally referred to by the “Chapter” in which they are codified in the Bankruptcy Code.

Chapter 7 bankruptcy basics.

Chapter 7 bankruptcy is designed for debtors with limited monthly income who are unable to pay their debts. The basic deal you make when you file a Chapter 7 bankruptcy is that you turnover all of your “non-exempt” property in exchange for a “discharge” of all of your debts and obligations that can be discharged.

Chapter 7 for most debtors is the most desirable type of bankruptcy case because it does not require you to repay your debts. Other types of bankruptcy cases–specifically Chapter 7 and Chapter 13–require you to propose a plan to repay all or part of your debts and to make payments of most of your disposable income over a period of years to obtain the same discharge that you can receive within months under Chapter 7.

Not every debtor, however, qualifies to be granted a Chapter 7 discharge. In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA” which is a commonly used acronym and is pronounced BAP-see-puh) which prevents debtors who make too much money from filing Chapter 7. Among other things, BAPCPA imposed the “Means Test” on consumer Chapter 7 filings. While there are a number of ways to pass the Means Test, the most common are (1) if your household income averaged over the past six months falls below the median income in your state for a household of your size, (2) your disposable income is not enough to cover your reasonable living expenses, or (3) most of your debt is not “consumer” debt (e.g. you guaranteed a loan for your business that failed).

Most debtors qualify for Chapter 7, but if you do not pass the household income test it is important to contact a Crystal Lake Bankruptcy Attorney to assist you with your filing. The means test is complicated and will receive scrutiny from both the trustee assigned to your case and by the United States Trustee.

Our team can quickly counsel you about whether you qualify for a Chapter 7 bankruptcy and, more importantly, whether it is right for you. The goal of many bankruptcy attorneys is to get your money and get your case filed, whether or not it’s right for you. That is not how we run our office, and we tell many debtors that the cure of bankruptcy is too strong medicine for the disease of debt.

Chapter 13 basics.

Chapter 13 bankruptcies, occasionally called “wage-earner bankruptcy,” are available to people earning an income that generates disposable income of at least $100 a month. Chapter 13 requires you to propose a plan to repay some or all of your debts over a period of three to five years.

While Chapter 7 is generally better if you can qualify for it, there are some instances where you might choose to file Chapter 13:

Mortgage Foreclosure. If your house is in foreclosure and you need to get it current but cannot get it current without an orderly payment plan, Chapter 13 may be right for you. That said, houses invoke all sorts of irrational emotions. We all are generally emotionally attached to our homes. We have the resources to tell you whether reinstating your mortgage through a Chapter 13 is prudent or whether you’re irrationally throwing good money at a bad housing investment.
Lien Stripping. If the second or third mortgage on your home is completely underwater (i.e. there is not even one penny of equity after the first mortgage), you can strip those liens off in Chapter 13. You cannot strip second mortgages and HELOCs off in Chapter 7.
Co-Signers. If you have co-signers on debt and would feel terrible about leaving those co-signers with sole liability for your loans, Chapter 13 can help.
Too Many Assets. If you have too many assets (e.g. a small business with some book value that you do not want liquidated or a sizable collection of guns or art), Chapter 13 can help you retain the business interest that you otherwise would have to liquidate in Chapter 7.

Aside from those four very specific scenarios, we do not recommend Chapter 13 to debtors who otherwise would qualify for Chapter 7.

Chapters 11 and 12 basics.

Chapter 11 is similar to Chapter 13 in that you must propose a plan and make payments toward your debt over time. Chapter 11 is inferior to Chapter 13 in every respect, but if you have too much debt to qualify for a Chapter 13 bankruptcy ($383,175 in unsecured debt and $1,149,515 in secured debt), Chapter 11 may be your only option.

Chapter 12 is a type of bankruptcy relief available to family farmers and commercial fishermen so that they can obtain a discharge similar to Chapter 13 without having to sell their farm or boat.

Crystal Lake Bankruptcy Attorney

Our Crystal Lake bankruptcy attorney has experience counseling individuals, families, recent divorcees, and small businesses about whether bankruptcy relief is right for them. We offer a no-obligation, no-fee initial consultation for bankruptcy clients to discuss and devise solutions for our clients.

Debt settlement instead of bankruptcy? There are tradeoffs.

December 12, 2014 By John P. Dickson

Most people who come into my office asking about bankruptcy want to get an understanding of the bankruptcy alternatives before pulling the trigger on a bankruptcy filing. Debt settlement is the most common alternative people ask about.

How debt settlement works (in theory).

In theory, debt settlement works like this: your original creditor sells the debt to a debt collector for 10 cents on the dollar (or even less sometimes), and the debt collector starts calling you, writing you, calling you at work, calling your relatives, etc. asking for payment. Because you are aware of the fact that the debt collector did not pay 100% of the face value of the debt to your original creditor, it is possible for you to settle the debt with the debt collector for less than you owe but more than they paid, creating a win-win situation for everyone involved. For example, if the debt collector purchased a $10,000 debt for $1,000 and if you settle that debt with the debt collector for $2,500, you are better off because you only have to pay back 25% of what you owed, and the debt collector is better off too because it just made a 150% return on its investment. This is how it should work.

Then the IRS steps in and complicates the debt settlement process.

Unwary settlers of debt often receive a nasty surprise from the IRS

The IRS will find a way to mess up your debt settlement.

One unforeseen consequence of debt settlement is that after you settle the debt for less than you owed you are supposed to report the discharged debt on your income tax return as income for the year. To further encourage you to report the settled debt on your taxes, the creditor is supposed to issue you an IRS Form 1099-C, which reports the canceled debt to the IRS.

This creates big problems for unwary settlers of debt for a couple of reasons:

Working off of the example above, you thought you were settling $10,000 of debt for $2,500. But, at the end of the year if you have to pay taxes on the canceled $7,500 portion of the debt and if you are a 25% tax bracket payer, the IRS is going to stick you with a bill for $1,875 bill at tax time.
Suppose you don’t have the $1,875 at tax time? Well, now you’re going to pay interest and penalties on the unpaid tax bill.
Even worse, because this is income tax debt, you cannot discharge the tax liability in bankruptcy until 3 years after it came due have elapsed.

Don’t get me wrong. Settling $10,000 of debt for $4,375 is a pretty good deal, but you should understand that you have two entities to pay to settle, not just the owner of the debt.

Also understand that Form 1099-Cs are not issued every single time a creditor writes off debt. You could get lucky and dodge this bullet. However, do not think you are out of the woods just because you settle debt in one year and have not received a 1099-C by the time you file your taxes. 1099-Cs can be issued years after the fact, so you have the unpleasant uncertainty of waiting for this bomb to drop some time in the future.

The beautiful thing about discharging debt in bankruptcy is that you do not have to pay income tax on the written-off portion of the debt. Even if the creditor sends you a 1099-C after bankruptcy, it is a relatively easy process to tell the IRS that you will not be including that written-off debt in your income by attaching a Form 982 to your tax return.

Bankruptcy is a better option for many people.

I usually decline to engage in the settlement of debts on behalf of my clients. I find that in most situations, an attorney would have to charge you too much to engage in the settlement negotiations, and a professional debt settlement negotiator is a better, more economical choice. I can recommend a good debt settlement negotiator in Crystal Lake. Ray of Hope Negotiations does good work, doesn’t rip people off, and I trust them (and, no, I haven’t been bribed by Gary for the recommendation).

What I can help you with, however, is filing bankruptcy. If your debts are too large to negotiate or if you do not want to deal with the uncertainty of being issued a 1099-C, bankruptcy is a great option for many debtors. Contact me to schedule a free consultation to discuss whether bankruptcy is right for you. The initial consultation is free, and I try to make it a low-pressure environment.

Crystal Lake bankruptcy attorney

August 13, 2014 By John P. Dickson

Making ends meet

Here are four tips you should consider when choosing your Crystal Lake bankruptcy attorney.

1. Do not get run through a mill.

We have all seen a prominent bankruptcy attorney’s late-night TV commercials where used to hock his tapes that talk about bankruptcy, and now he has dozens of locations over the Chicagoland area. Even if you like and trust the guy on the commercial, what are the odds that he will be your attorney? Basically zero. Your case will be assigned to a fresh-faced attorney, straight out of law school who is learning on the job. Choose a bankruptcy lawyer with experience, who lives in the Crystal Lake area, and who understands your personal needs.

2. Choose a lawyer you can build a relationship with you.

At most bankruptcy law firms, paraprofessionals and secretaries do most of the work, and after you sign up with the attorney you met at your consultation, you never speak with that attorney again. If you paid for a lawyer, you had better have a lawyer working on your case. In selecting a Crystal Lake bankruptcy, ask the attorney outright how much of the work on your case will be performed by that attorney. The answer often will shock you. I personally do nearly all of the work on my clients’ bankruptcies, am available to talk on the phone whenever you need, and enjoy helping to guide my clients through this major life change.

3. Do not choose a lawyer with a limited toolkit.

Bankruptcy is strong medicine and is not for everyone. If you are reaching out to a Crystal Lake bankruptcy attorney, you probably have already made up your mind that you want to file bankruptcy. It is worthwhile, however, to talk to an attorney to see if there is a better solution. Debts can be negotiated. Mortgages can be modified. Creditors understand hardships and often are willing to work with you. Lawsuits can be defended and won. If you talk with an attorney who exclusively practices bankruptcy law, you likely will not find out about non-bankruptcy alternatives to managing your debt. I can help you evaluate your alternatives and determine if bankruptcy is truly the right solution for you.

4. Set an appointment with a Crystal Lake bankruptcy attorney who offers free, in-person consultations.

The bankruptcy mills I warned you about above will charge you upwards of $150 to sit down with an attorney to discuss your options. I never charge prospective clients a fee to sit down and feel me out. Sometimes I’m the wrong person for the job. More often than not, I am the right guy.