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3 Dischargeable Debts In Bankruptcy

Posted on: December 4, 2017 by in Bankruptcy, debt
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In the words of several Supreme Court Justices, the Bankruptcy Code is designed to give the “honest but unfortunate debtor” a fresh start. This label applies to almost all the voluntary bankruptcy petitioners in Illinois and Indiana. Since it would be impossible to get this fresh start with unpaid accounts still hanging over the debtor’s head, most all unsecured debts are dischargeable. “Unsecured debts” are those that include only a promise to pay and are not secured by property, such as a house or car.

That being said, there are some restrictions and limitations on discharge, or forgiveness of debt.

Medical Bills

The leading cause of consumer bankruptcy filings is also the classic example of unsecured and dischargeable debts. Because they are usually involuntary (no one asks to get seriously ill), many moneylenders are also a little more understanding about medical bill-related bankruptcies, especially if the debtor has a reasonably good credit history otherwise.

Bankruptcy ends the obligation to repay the debt but not the medical debt itself. That’s normally a good thing, because many medical creditors are willing to accept a partial payment post bankruptcy and notate the debt as “paid,” because they know that a partial payment is much more than they are likely to get otherwise. Such a note helps improve the debtor’s credit score and also demonstrates additional financial diligence to other potential creditors.

Credit Cards

Rising interest rates are just one reason that credit card debt now eclipses $16,000 per household. Now that the Great Recession is in the rearview mirror for most people, they have more confidence and are spending more. Unfortunately, many of us spend money that we do not have, and that sometimes leads to bankruptcy filings.

The automatic stay often comes into play with regard to credit card debt, because these moneylenders are normally quick to file suit over delinquent accounts. Under Section 362, all these lawsuits must stop at the moment the debtor files a voluntary petition, at least in most cases. Furthermore, since the discharge order eliminates the obligation to repay the credit card, the lawsuit cannot be revived.


Past due state and federal income taxes are both dischargeable in bankruptcy, provided that the following conditions are met:

  • – The tax must be at least three years old,
  • – The returns must have either been filed on time or at least been on file for a minimum of two years, and
  • – The debt has not been assessed in the last 240 days (in plain English, that usually means the taxpayer has not received a collections notice in the last nine months).

Bankruptcy only discharges past-due tax debt and not any tax debt associated with fraud or willful evasion. Furthermore, if the taxing authority has filed a lien, that lien remains in place, because the bankruptcy judge only has the power to extinguish the legal obligation to repay the debt.

Some unsecured debts are not dischargeable for policy reasons, such as family support obligations (FSOs). However, the automatic stay still applies, so bankruptcy will stop FSO-related lawsuits and wage garnishment.

Reach Out to Experienced Attorneys

Most people emerge from Chapter 7 or Chapter 13 bankruptcy with no unsecured debt. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.


Do I Qualify For Bankruptcy?

Posted on: November 21, 2017 by in Bankruptcy
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Almost anyone can file either Chapter 7 or Chapter 13 bankruptcy and take advantage of the automatic stay to prevent adverse action, including repossession and foreclosure. But not everyone can obtain a Chapter 7 or Chapter 13 discharge, because each section has important financial and non-financial qualifications.

In reality, these qualifications are more like guidelines that steer families into the type of bankruptcy that is best suited for their financial situations, thus preventing them from compounding past mistakes or misfortunes with additional preventable errors.

Consumer Bankruptcy Qualifications

In 2005, Congress passed the oddly-named Bankruptcy Abuse Prevention and Consumer Protection Act, based on the mostly erroneous notion that families purchased expensive luxury goods with credit cards then immediately filed bankruptcy to avoid paying for them. This law requires all bankruptcy debtors to take a pre-filing debt counselling class. Each course usually costs about $20 or $40 and can be completed online in twenty or forty minutes.

Thereafter, before debtors receive their discharge orders, they must complete an additional budgeting and financial management class. These courses are available online as well. Additionally, free live classes are usually available at many bankruptcy trustee offices.

The other non-financial qualification — the duty to cooperate with the trustee — has been around for quite some time. At a minimum, that involves attending the 341 creditors meeting providing proof of identity (Social Security card and driver’s license) and proof of income. Most trustees want the last two years of tax returns and the last two months of paystubs or business profit and loss statements.

Some trustees require additional documents, such as insurance declaration pages and home mortgage documents. These requests usually do not mean that there are problems with the bankruptcy; they just mean that the person who oversees the bankruptcy for the judge wants more paper in the file.

Chapter 7 Qualification

The means test is another BAPCPA reform. To qualify for Chapter 7, a debtor’s income (or joint income) must be lower than the average income for that family size in that geographic area. As of November 2017, the figure for a family of four is just under $95,000 in Illinois and just over $79,000 in Indiana. The number changes about once every three months.

These are average figures. The actual threshold for a particular family in a particular location may be considerably different, so it’s important to consult with an experienced attorney.

Chapter 13 Qualification

Chapter 7 debtors must have low incomes because these filings are essentially declarations that the debtors cannot afford to pay their obligations. On the other hand, since Chapter 13 debtors essentially declare that they need income-based payment plans, they must demonstrate that they have sufficient income to support such plans.

An attorney can normally estimate the monthly debt consolidation payment to determine if a Chapter 13 is sustainable. This payment must fully satisfy all secured debt arrearage, cover a 10 percent trustee payment, and also satisfy all unsecured debts in the same way as a Chapter 7 (which usually means no unsecured debt payments).

Debtors who find that they cannot afford the debt consolidation payments can convert to Chapter 7 at any time.

Rely on Experienced Attorneys

Different debtors have different bankruptcy choices. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle cases in both Illinois and Indiana.


The Different Types Of Bankruptcy

Posted on: November 13, 2017 by in Bankruptcy, chapter 13, chapter 7
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The Bankruptcy Code provides for several different types of consumer bankruptcy, but nearly all these voluntary petitions fall under either Chapter 7 or Chapter 13.

Both these plans have some things in common. In each case, the debtor must undergo pre-filing debt counselling, as well as a post-filing financial management class. Both types trigger the automatic stay, in most cases. So, moneylenders may not take any adverse action against debtors while their cases are pending. That includes demands for payment, harassing phone calls, repossession, eviction, and foreclosure.

There are some significant differences as well, as each chapter is designed for a certain kind of debt problem.

Chapter 7

Sometimes called “liquidation” bankruptcy, although that term is not accurate, Chapter 7 is essentially a declaration that the debtor is completely unable to pay his/her outstanding unsecured debts in the way that the moneylender demands they be paid. Therefore, the debtor gives permission for the bankruptcy judge to seize and sell all nonexempt assets to satisfy that debt.

Most people do not have nonexempt assets, unless they own luxury items, like vacations homes and boats. Even then, the trustee (person who oversees the bankruptcy on behalf of the judge) might not seize the item, if its sale would not significantly benefit the creditors. For example, a vacation home might have a large mortgage that must be satisfied or a boat might need substantial work to get it in a saleable condition.

About six weeks after the petitioner files a petition and schedules, the trustee inspects the paperwork to ensure that it is all in order and also verifies the debtor’s income and identity.

Typically, about six months later, the judge discharges all unsecured debts. This category includes all medical bills, Small Business Administration loans, and credit cards, as well as most income taxes and some student loans. As a result, the debtor has the fresh financial start which the Bankruptcy Code guarantees.

Chapter 13

The so-called “wage earner plan” is often ideal for people who are behind on home mortgage payments, auto loans, and other secured debts. After reviewing the debtor’s paperwork, the trustee basically places the debtor on an allowance for either three or five years, largely depending on the household income level, to give the debtor a chance to catch up on past-due secured debt payments. The moneylenders may not successfully object to the debtor’s proposed repayment plan except in very rare circumstances, and they may not take any adverse action against debtors during the protected repayment period.

At the end of three or five years, any remaining unsecured debts are discharged, and the debtor has a fresh financial start while retaining all of his or her exempt assets.

Chapter 20

This one is not in the bankruptcy code, but it is a very common approach. Some Chapter 13 debtors soon realize that they cannot afford the monthly debt consolidation payment. In these cases, it is sometimes best to voluntarily dismiss the Chapter 13 and refile it as a Chapter 7, since the debtor has a right to convert the case at almost any time. In this way, the debtor needs not make any more payments, the automatic stay remains in place, and the debtor receives a fresh start much earlier than under a Chapter 13.

Connect With Experienced Attorneys

Different debtors have different bankruptcy choices. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.


Some Key Pre-Bankruptcy Steps

Posted on: November 6, 2017 by in Bankruptcy
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Many financial events, such as investments, largely depend on timing to determine success or failure. Bankruptcy is much the same. If a Chapter 7 or Chapter 13 is filed too early, it can feel like using a flamethrower to kill a housefly. If on the other hand the voluntary petition is filed too late, considerable damage may have already been done, and such damage is sometimes difficult to correct.

As a rule of thumb, if the debtor owes more than about $10,000 in credit card or other unsecured debt, a Chapter 7 petition is probably a good idea, because that amount is more money than most people can comfortably afford to repay. If secured debt is the issue, and the debtor is more than 60 days delinquent, a Chapter 13 petition is probably a good idea, because adverse action — perhaps including pre-foreclosure — is probably just around the corner.

Initial Assessment

Before taking any concrete steps to prepare, it’s usually important to take just a few moments for self-reflection. In a nutshell, if the debtor is in financial distress due to his or her own choices, the debtor will probably file bankruptcy again sooner or later unless these issues are addressed.

Typically, this process does not take very long. That’s because most people file bankruptcy because of a sudden adverse event, such as a job loss, medical emergency, or divorce. Over two-thirds of Americans have less than $1,000 in savings, so most people simply do not have the resources to cope with such situations.

That being said, some people file bankruptcy because they misallocate the resources that they have. The government most likely had these kinds of preventable bankruptcies in mind when Congress passed the 2005 Bankruptcy Reform Act which required, among other things, pre-debt counseling.

Debt Counseling

All debtors must complete counseling courses before they file their voluntary petitions. In most cases, these classes are simply a formality, but in some cases, such sessions can be very enlightening and empowering.

In most cases, these classes can be completed online in about a half hour for only a few dollars. Before you enroll in a class, be sure that it’s approved by the court where your petition is to be filed, because the list changes frequently.


At some point, probably during an initial or followup consultation with a bankruptcy attorney, the debtor must decide what form of bankruptcy to pursue. Sometimes, the means test affects this decision.

To qualify for Chapter 7, the debtor’s household income must be beneath the average income amount for that geographic area. As of May 1, 2017, the amount for a family of four in Indiana is usually $77,566 per year. The number changes every few months, and it also varies according to the debtor’s specific expenses as well as geographic area (it is more expensive to live in Chicago than in Marion).

Contact Experienced Attorneys

Successful bankruptcies begin with good foundations. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After-hours appointments are available.


Obstacles To Bankruptcy: Security Clearances

Posted on: November 2, 2017 by in Bankruptcy
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Some distressed debtors who work at one of the many military bases in Illinois or Indiana, or at one of the many private companies that support these installations, hesitate to file bankruptcy because they are afraid that a voluntary petition will mean the revocation of their security clearance.

But it is illegal to take any adverse action against any individual based solely on a bankruptcy filing. Moreover, the DoD cannot unilaterally take such action. Instead, the security clearance holder must receive actual notice of the proceedings and have an opportunity to present a defense. Finally, according to DoD Directive 5220.6, a Chapter 7 or Chapter 13 petition may actually be the only way to save a security clearance that’s already in jeopardy.

Likely Considerations

As an area of concern, financial considerations are rather far down the list. They are well below items like foreign influence and even sexual misconduct. In other words, individuals who have in-laws who work at foreign consulates or those with disturbing relationship histories are far more likely to suffer adverse action than those with debt problems. The specific concerns are:

  • History of Unmet Obligations: Even if the debtors have multiple unpaid accounts on their credit reports, which is not always the case, such credit history is usually related to one financial storm, such as a job loss, that had a snowball effect.
  • Illegal or Deceptive Practices: Persons with issues such as “embezzlement, employee theft, check fraud, income tax evasion, expense account fraud, filing deceptive loan statements, and other intentional financial breaches of trust” hardly ever file bankruptcy, mostly because such obligations are often not dischargeable.
  • Financial Problems Tied to Security Concerns: Similarly, almost no one files bankruptcy due to “gambling, drug abuse, alcoholism, or other issues of security concern.”

So, most of the listed concerns do not apply to consumer bankruptcy, a fact that carries considerable weight in any adverse action proceedings, such as an attempt to downgrade or revoke a security clearance.

Possible Defenses

The opposite is true of the listed mitigating circumstances, because nearly all of them apply to those who seek consumer bankruptcy protection.

  • Isolated Incident: The same one time storm/snowball effect argument discussed above applies here as well.
  • Uncontrollable Circumstances: Just as people cannot control the weather, people also have either no control, or very limited control, over “loss of employment, a business downturn, unexpected medical emergency, or a death, divorce or separation.” All these things prompt many bankruptcy filings, and they are all explicitly listed in E2.A6.1.3.3.
  • Good Faith Resolution Effort: A Chapter 13 petition certainly qualifies as a good faith effort to “repay overdue creditors,” and a Chapter 7 petition is often the only alternative available to “otherwise resolve debts.”

Another mitigating circumstance — “The person has received or is receiving counseling for the problem and there are clear indications that the problem is being resolved or is under control” — also applies to all consumer bankruptcy petitions.

Count On Experienced Attorneys

Bankruptcy petitioners have little to fear in the way of security clearance revocation. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.


Three Quick Ways To Rebuild Credit After Bankruptcy

Posted on: October 23, 2017 by in Bankruptcy
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Some people do not file a necessary bankruptcy because they think it will “ruin their credit rating for seven years.” That’s partially true, because a completed Chapter 13 bankruptcy stays on a credit report for seven years. That’s also partially untrue, because the debtor’s credit rating is already very low due to current issues. Late payments, repossessions, and foreclosures also stay on most credit reports for seven years.

Nevertheless, for those who understandably do not want to wait seven years for their post-bankruptcy FICO scores to improve, here are a few tips to hasten the process.

Stay Current on Secured Debts

Late payments ruin a credit score faster than almost anything else, which means that on-time payments raise a credit score faster than almost anything else. That’s especially true of those periodic payments which are reported directly to the credit bureaus, including mortgage payments, vehicle payments, and insurance payments.

Come hell or high water, stay current on these payments after bankruptcy, not only to rebuild your credit score, but also avoid a repeat filing.

One good method is to make thirteen payments every twelve months. That usually means about another $50 or $75 a month, which most families will never miss. The cushion gives families the flexibility to make it through another rough patch. Moreover, the stellar payment history makes moneylenders more likely to defer a payment until the end of the loan rather than taking adverse action against the debtor.

Refinancing may be an option as well. Many bankruptcy attorneys can connect former debtors with banks who specialize in post-bankruptcy restructurings.

Get a Credit Card

There are plenty of credit cards available to people who recently emerged from Chapter 13 bankruptcy, mostly because moneylenders know that these debtors cannot file another voluntary petition for a number of years. Ideally, the card should be one with a low initial credit limit that is easy to raise after a few months of timely payments.

A secured card may be an option as well. Try to choose a card that does not include a “secured” designation on a credit report, because such a label diminishes the payments’ effect on a score.

It’s usually best to charge several hundred dollars a month and pay off almost the entire balance every month. In this way, the unpaid balance stays low, there is considerable activity on the card, and the bank earns a little money off the interest.

Keep Making the Debt Consolidation Payment

In most cases, a Chapter 13 debt consolidation payment is about $400 or $600 a month. Instead of giving that money to the trustee, keep it in a savings account. Your family is already accustomed to living without this money, so there is no shock. The money adds up quickly, and in just a few months, a family will have an emergency fund of several thousand dollars, which is probably enough to weather almost any financial storm.

Rely on Savvy Attorneys

Bankruptcy can be the gateway to a higher credit score. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After-hours appointments are available.


Bankruptcy And Student Loans: A Primer

Posted on: October 16, 2017 by in Bankruptcy, student debt
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Although student loans are unsecured debts, like credit cards, Small Business Administration loans, and medical bills, they are not automatically dischargeable like these other obligations. In fact, several years ago, Congress even closed the private student loan loophole, which is bad news for former ITT Tech students and other similarly situated borrowers.

There is an old saying among attorneys that “bad facts make bad law,” and that’s certainly the case in this regard, when closely examining the landmark decision Brunner v. New York State Higher Education Services.

The Brunner Rule

About ten years before the Second Circuit in New York decided this case, federal lawmakers rewrote the Bankruptcy Code, and there was considerable controversy about the student loan provision. Previously, such debts were automatically dischargeable. But there was some concern that student protesters in the 1960s borrowed their way through school and then adamantly refused to repay their loans.

Whether that was true or not, Congress included a provision that student loans could be discharged only upon showing of “undue hardship,” but lawmakers left it up to the courts to define that phrase.

Along came Marie Brunner, who graduated with a master’s degree in social work and had no apparent problems finding employment. Almost immediately thereafter, she asked a bankruptcy judge to discharge her debt, despite the fact that she had made no payments and had never asked for any other lesser kind of relief, such as a temporary forbearance.

In response, the appeals court endorsed what soon became known as the Brunner rule. It stated that student loans could be discharged in bankruptcy only if the debtor:

  • – Had made a good faith effort to repay the loan,
  • – Suffered from a long term disability, and
  • – Could not maintain a minimal standard of living if forced to repay the debt.

At first blush, the Brunner rule seems impossible to meet, since the elements of the test seem inconsistent, viz, if one cannot maintain a minimal standard of living, how can one make a good faith repayment effort? As a result only about .01 percent of consumer bankruptcy petitions even ask for a student loan discharge.

Meeting the Brunner Rule

Yet according to this same survey, about 40 percent of debtors who ask for student loan relief receive at least a partial discharge.

One factor in the debtor’s favor is that student loan debt is much, much higher now than it was forty years ago. Many people, especially those with graduate degrees, owe $40,000 or more, and it is a lot harder to pay off that amount of debt as opposed to $15,000 or $20,000.

As for the “minimal standard of living” prong, it’s generally understood that this level is akin to the poverty line, but there is a big difference between “generally understood” and black-letter law. If the debtor has to put off major purchases because of the student loan, some judges may be sympathetic and allow at least a partial discharge.

There’s another old saying in the law that “you don’t get anything unless you ask,” and in these cases, it may be worth asking for student loan discharge.

Connect With Experienced Attorneys

Student loan discharge is difficult, but not impossible, in consumer bankruptcy cases. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We aggressively represent student loan borrowers.


Four Dischargeable Debts In Bankruptcy

Posted on: October 9, 2017 by in Bankruptcy, chapter 13, chapter 7
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The end result of a bankruptcy petition, in almost all cases, is a fresh financial start for the honest yet unfortunate debtor. To get this fresh start, the bankruptcy judge will discharge (legally forgive) many different kinds of debts.

Sometimes, debtors want to pay what they owe, or at least most of it, but they lack the means to do so. Such repayment is an option in both Chapter 7 and Chapter 13 cases, because even if the debt is legally discharged, the moneylender will almost always still accept payments.

Credit Cards

The math is very simple. Since 2003, wages have increased by 28 percent and prices on many items have increased between 35 and 55 percent. Something has to fill in the gap, and in most cases, that something is borrowing money on credit cards. In fact, the average credit card-holding household has account balances over $16,000 in revolving debt alone.

There is no doubt that poor financial planning and overspending account for some of this debt, but unexpected emergencies, such as medical bills and unemployment, account for a lot more.

Since there is no security agreement, credit card debt is dischargeable in both Chapter 7 and Chapter 13 cases. In addition, because of the automatic stay, moneylenders cannot pursue any adverse actions, such as lawsuits, while the case is pending.

Medical Bills

As most people might expect, medical bills have increased more than most other types of expenses over the past fifteen years, and even if the debtor has good medical insurance, the membership fees, copays, and deductibles are often financially debilitating.

Legally, medical bills fall into the same category as credit cards and so they are completely dischargeable.

Signature Loans

Small Business Administration and other bank loans, as well as payday and other nonbank loans, are also unsecured, even if the lender required bank account information or if the debtor agreed to a certain withdrawal on a certain day.

Student loans, whether or not a governmental unit guaranteed them, are only dischargeable if the debtor establishes undue hardship, and admittedly, that is not an easy showing to make in court.


Somewhat similarly, income taxes, as opposed to payroll and other kinds of taxes, are dischargeable only under limited circumstance, but the showing is a little easier to make because it is based on time as opposed to other circumstances. The rules for both the IRS and state taxing authorities are:

  • Tax must be at least three years old,
  • Returns have been on file for the past two years, and
  • The authority has not assessed the debt in the last 240 days, which usually means that the taxpayer has not received a notice or bill in that time period.

The IRS, as well as states, are very particular on dates, and it is not unusual to see opposition based on one or two days off the deadlines.

If the taxing authority placed a lien on the taxpayer’s assets, such liens remain, because the bankruptcy judge has limited powers.

Contact Experienced Attorneys

Most debts are dischargeable in bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We handle cases in both Illinois and Indiana.


Exempting Houses And Cars In Illinois Bankruptcies

Posted on: October 2, 2017 by in Bankruptcy, chapter 13, chapter 7
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Whether the voluntary petition is filed under Chapter 7 or Chapter 13, most all common consumer assets are exempt in Illinois, meaning that debtors rarely, if ever, must forcibly surrender their property to the bankruptcy trustee (person who oversees the case for the judge).

Bankruptcy protects assets to help fulfill the law’s mission of a fresh financial start for “honest yet unfortunate” debtors. If Illinois filers lost their houses, cars, and other important assets, they would go back behind the starting line, an outcome that’s clearly not contemplated by the Bankruptcy Code.

All that being said, if the asset is secured by a mortgage or other loan, the debtor must keep making payments as originally agreed, at least in most cases.


Up to $15,000 in equity for a single filer ($30,000) for joint filers) is exempt under 750 ILCS 65-22.

Per the Bankruptcy Code, the debtor must declare the house’s as-is cash value, which may be substantially lower than the fair market value, because cash-paying home investors usually pay a maximum 60 cents on the dollar.

Although the value difference makes no difference in the amount of equity, as that figure remains the same regardless of the home’s value, the distinction makes a tremendous difference in terms of the loan-to-value ratio. Assume a single filer has a $200,000 home with $20,000 in equity and a $180,000 loan balance. Given those facts, the trustee could theoretically force the debtor to sell the house for the $5,000 in unexempt equity, although the judge would have to approve such a plan.

But the as-is cash value of that house may be as low as $100,000, meaning that the debtor is upside-down on the residence and there will be no sale.

There are some other loan-to-value issues related to exempt homesteads as well, including:

  • – Lien Strip: If the property’s value is too low to secure a second mortgage or other junior lien, the bankruptcy court may declare it to be unsecured, thus freeing the debtor from the obligations to make payments on that debt.
  • – Cram Down: In some cases, the outstanding loan balance can be reduced to match the property’s fair market or as-is value.

These options, and specifically a cram down, may be available for other assets as well, such as motor vehicle loans.


$2,400 in equity for a single filer ($4,800) for joint filers is exempt under 735 ILCS 5/12-1001(c). Typically, newer cars have almost no equity because the outstanding loan balance is so high, and older vehicles have almost no equity because they have almost no value.Once again, the debtor must declare the as-is cash value, which can be readily obtained from a site like

In addition to the cram down mentioned above, redemption may be an option as well, especially in longer lasting Chapter 13 cases. If the debtor pays the full fair market value of the collateral, the moneylender may be unable to collect the remaining balance on the loan, no matter how high it is.

Count On Experienced Attorneys

Nearly all bankruptcy debtors get to keep their houses, cars, and other key assets. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.


What’s The Difference Between Chapter 7 And Chapter 13?

Posted on: September 25, 2017 by in Bankruptcy, chapter 13, chapter 7
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A number of times over the last hundred years, and perhaps most recently in 1998, the Supreme Court has reaffirmed that the purpose of the Bankruptcy Code is to give the “honest but unfortunate debtor” a fresh start. There is only one kind of honest, but there are several kinds of misfortune, which is why there are basically two types of bankruptcy.

The most successful bankruptcy debtors either are victims of unforeseeable, and usually once in a lifetime, financial storms, or they understand the mistakes they made and are committed to doing better. Many times, there is a little bit of both, as the debtor may have had an unhealthy financial habit or two that created a vulnerability to job loss, divorce, medical bills, or another unexpected event.

Chapter 7

If the debtor has mostly unsecured debts, which are credit cards and other debts that the debtor has promised to repay, an ill-named liquidation bankruptcy may be the best option. This nickname is inaccurate because, in most cases, Chapter 7 debtors do not lose any of their assets. By law, Indiana and Illinois debtors can keep their:

  • – Retirement Accounts: If the IRA, 401k, or other nest egg was earned and not inherited, the debtor can keep the entire amount, regardless of the account balance.
  • – House: Both Illinois and Indiana use value-based exemptions that protect a certain amount of home equity in a primary residence. Bear in mind that if the house is worth $200,000 and the debtor still owes $190,000, the exemption only needs to protect the $10,000 in equity.
  • – Cars: The same rule applies for motor vehicles, and generally, new cars have almost no equity and used cars have almost no value.
  • – Personal Property: Other personal property, including cash in many cases, is also exempt.

To determine value, the debtor must declare the as-is cash value (“garage sale”) value. This amount is usually much lower than the fair market value.

About six weeks after the debtor files a petition and schedules, the trustee (person who oversees the bankruptcy on behalf of the judge) reviews the paperwork to ensure that everything is in order, and about six months later, all unsecured debts are discharged.

Chapter 13

Other debtors have issues with secured debts, such as home mortgages and vehicle loans. In these cases, the debtor probably does not want the debt to disappear, because that would mean losing the secured asset. So, the wage earner plan is probably a better option. Chapter 13 debtors have up to five years to catch up on secured debts, and during the entire period, they are under the protection of the bankruptcy court. So, in most cases, moneylenders cannot take any adverse action during this time, and that includes anything from harassing phone calls to repossession.

During the trustee meeting, the debtor and trustee come up with an income-based repayment plan, which is nearly always a better alternative to the debt-based “repayment plans” that moneylenders offer.

Debtors can voluntarily convert their plans from Chapter 13 to Chapter 7, and vice versa, at almost any time. So, many debtors file a Chapter 13, and if they find they cannot afford the debt consolidation payments, they convert to Chapter 7, wrap things up quickly, and take full advantage of their fresh starts.

Go With Experienced Attorneys

Different distressed debtors have different legal options in bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Our attorneys are licensed in both Illinois and Indiana.