Illinois Employee Credit Privacy Act

In 2010 the Illinois legislature passed the Employee Credit Privacy Act to protect employees from losing job opportunities based on negative credit reports. The law takes affect on January 1, 2011.  The new law forbids an employer or a potential employer from discriminating against a person based on their credit history, and prohibits the use of a person's credit report or credit history as a basis for employment, discharge, or compensation.

The federal bankruptcy law has long forbidden an employer to discriminate against anyone in the job market who has filed bankruptcy, and it makes sense for the states to extend this coverage to credit problems, that are not severe enough to require bankruptcy.

The legislators have included a provision of the law which I believe will make it far more effective. Instead of merely telling employers that they cannot use the credit history in making their decisions; they have also included prohibitions against an employer or a potential employer inquiring about an individual’s credit history or obtaining a credit report on an employee or a potential employee.


As a bankruptcy lawyer I have encountered many individuals, who are worried about losing their jobs, when they file bankruptcy. I always point out that this conduct by their employer would be a violation of the bankruptcy law, but while this offers some comfort it does not totally eliminate the fear that an employer might just invent another official reason , when they are really firing someone for going bankrupt. Thus I believe making it illegal for the employer to even view the credit report adds a lot to the level of protection.

Unfortunately, the legislation blunted the protection in some other cases. Public employers, insurers, financial institutions and debt collectors are exempt from the provisions of the act. Also, an employer might be able to avoid the prohibition by claiming that credit history related to a bona fide job requirement.

Loans From Qualified Retirement Plans

Some individuals suffering financial problems attempt to avoid having to file a Chapter 7 bankruptcy  or a Chapter 13 bankruptcy by withdrawing funds from a qualified retirement plan to pay their debts However, this strategy is seldom a good idea. In the first place qualified plans are designed to provide for a worker’s retirement, and withdrawing the funds to apply to current problems can lead to devastating long term consequences by leaving the workers with little means of support during the final years of their lives.
In addition qualified plans contain tax incentives to encourage people to use these plans and save for their retirement, and the flip side of these incentives is that withdrawing the funds early has a heavy tax cost that can add to a person’s financial problems.

Finally, creditors cannot levy against qualified plans to collect on judgements. Someone, who is struggling to pay his or her debts should not give up this protection, and it is never a happy situation when someone deletes their 401k trying to pay off debts and ends up filing bankruptcy anyway.

As an alternative to withdrawing from a retirement plan, some plans allow the participant to take out a loan. Qualified loans from 401k plans or other qualified retirement or profit sharing plans must be repaid in five years, and the employee must repay the loan in basically level payments made at least quarterly. The interest portion of these payments are not deductible for tax purposes. The loans cannot exceed the lesser of $50,000.00 or the employees nonforfeitable balance in the plan.


Borrowing from a qualified plan is not an ideal solution to a financial crisis, since these loans can often prove difficult to repay; and the law treats a failure to repay as a taxable distribution from the plan. However, borrowing is better than a total withdrawal, because you still have the possibility of being able to repay the loan, and even if you fail to repay the entire amount you will receive the benefits of a qualified plan on the portion you do manage to repay.

Tax Deduction for Student Loan Interest

      Individuals who have incurred large debts in th process of acquiring an education do not always achieve the success they had hoped for with their degrees, and thus the bankrupty law  can create quite a burden by denying a discharge of student loan debts in most cases.

      This does seem fair in many ways, since these debtors incurred the student loans in an effort to improve themselves, which public policy should encourage. Yet unlike a person, who cannot keep track of his credit card debt, an individual, who studied hard in college or professional school and learned after he graduated that the opportunities for someone with the credentials he has worked so long to acquire just do not exist, can generally not receive relief in bankruptcy.

      One break the law does give to people having student loans though comes when they file their tax returns. Individual taxpayers may deduct up to $2,500 of interest a year on student loans, and this is an above the line deduction, which means the former student will receive the benefit, even if he or she does not itemize deductions.

      The deduction phases our for individuals having modified adjusted gross incomes of between $60,000 and $75,000 a year, or for couples filing joint returns who have between $120,000 and $150,000 of modified adjusted gross income. Modified adjusted gross income for this purpose means adjusted gross income with a couple of modifications that the law creates for purposes of figuring this deduction.

      To qualify for the deduction for interest on student loans, the taxpayer must be paying interest on a loan for qualified higher education expenses incurred by himself or his spouse, when the recipient was at least a half time student. Qualified higher education expenses include, room and board and related expenses involved in attending an institution of higher education as well as tuition and fees.

What is the Means Test?

The means test is a formula created by Congress and included in the 2005 revision to the bankruptcy law. The test is the centerpiece of the bankruptcy overhaul law and is used to calculate whether an individual filing bankruptcy has any income available to pay toward his unsecured debts. The means test is first used to determine, if an individual has enough income available to make payments on his unsecured debts, and if his income exceeds a certain amount the debtor will not be allowed to file a Chapter 7 bankruptcy, in which the court would have granted him a discharge without first requiring him to make monthly payments toward his debt. If the income is above the thresh hold for a Chapter 7 the law will only allow him to file a Chapter 13 bankruptcy in which he makes monthly payments for a five year period.

If an individual must file a Chapter 13 the means test will also be used to determine how much his plan payments will have to include to cover unsecured debts. Needless to say for a bankruptcy lawyer a thorough understanding of the means test is now a necessity.

The means test starts by taking the debtors average monthly income for the six months before filing the petition and subtracting out what the bankruptcy law allows as deductions. For most expenses such as food, clothing, personal care, transportation, utilities etc the debtor receives a standard allowance for the expenses regardless of his or her actual expenses. For certain items however such as taxes, mortgage and car payments, medical expenditures, health insurance, day care, child support and charitable contributions up to 15% of one’s income, the debtor may deduct his actual expense.


The income less the allowable expenses produces what is called current monthly income, and unless he qualifies for a Chapter 7 an individual debtor will have to pay at least 60 times the current monthly income to his unsecured creditors.

Bankruptcy and Credit Reports

A person’s credit rating  credit rating has become very important in modern society, and in the twenty-first century credit rating agencies have perhaps become the equivalent of the ever present Big Brother, who kept the entire population in a state of fear, in George Orwell’s 1984. A low credit score will increase the rate of
interest a consumer pays on a loan, or in some cases prevent a person from getting a loan altogether. Insurance companies review credit ratings as part of their underwriting process,employers check credit scores when they are hiring a new employee and sometimes before they approve a current employee's promotion, and landlords will often refuse to rent an apartment to an individual who has credit problems.

Thus it is hardly surprising that one of the questions many people ask, when they consult a bankruptcy lawyers, is how  will a bankruptcy affect my credit score.  The simple answer is that bankruptcy shows as a negative item on your credit report, and it will stay on your credit report for ten years.


 However, as a practical matter filing bankruptcy will usually improve an individual’s credit score.  This is because  in most cases by the time an individual files a bankruptcy he or she usually already has a number of negative negative items on his credit score, such as missed mortgage payments, failure to pay the minimum charge  charge on a credit card, judgements, garnishments, etc.  When an individual files a chapter 7 or chapter 13 bankruptcy this goes on the credit report, but all these other items disappear from the report, and if she pays her bills going forward her credit will start to improve.

If an individual does not file bankruptcy on the other hand the late payments, judgments and garnishments will stay on his credit report until he catches up on these debts, and the reason most people consider filing bankruptcy is because they realize they are unlikely to be able to pay off these items in the foreseeable future.

Can A Chapter 13 Bankruptcy Plan Be Amended

Individuals entering a Chapter 13 bankruptcy generally are committing to make payments out of their disposable income for a three to five year period, and as they frequently point out to their bankruptcy lawyers a lot can change in this period of time. They could lose their job, they could have medical problems or give birth to additional children, or they could get divorced and have to support two households instead of one.

If such traumatic events occur many debtors will be unable to make their Chapter 13 plan payments, and as a bankruptcy lawyer I can see why they become nervous about making this long term commitment.
The law however offers some relief in these situations. A Chapter 13 bankruptcy plan can be amended after the court confirms the plan, if a substantial change of financial circumstances has occurred. The debtor may petition the court to amend the plan, and in many cases the court will grant lower payments. Or if circumstances grow so bleak that the debtor can no longer afford to make any payments, he or she can convert the Chapter 13 bankruptcy to a Chapter 7 bankruptcy.

Unfortunately, when the payments go down it may become impossible to meet some of the debtor’s goals under the plan. In many cases the reason for choosing a Chapter 13 over a Chapter 7 is because the Chapter 13 allows a homeowner to stop a foreclosure by paying back the mortgage arrearage over a five year period. This requires the plan to pay back the entire amount of the shortage though, and while an individual will still receive his discharge after amending the plan, if there is not enough money remaining to pay-off the mortgage delinquency the foreclosure may proceed.

A similar situation can occur when the debtor was counting on paying off non-dischargeable tax debts. A Chapter 13 must pay off 100% of the non dischargeable portion of the tax liability, and while a person may be able to obtain a Chapter 7 discharge after a drop in income, if he converts he will still have to deal with the IRS after the bankruptcy is finished.

Home Mortgage Debt Forgiveness

These days approximately one quarter of the homes in America have dropped in value to levels that are less than what the home owners owe on their mortgages. This often leaves the borrower unable to keep up the payments on the loan, which in many cases leads to the loss of the residence.

And unfortunately the loss of his residence is not necessarily the end of the former home owner’s problems. If the bank forecloses on the property, because the owner cannot make the payments, the court will order the house to be sold in an auction. In many cases the auction price will be too low to pay the balance on the mortgage, and the court will enter a judgement ordering the former homeowner to pay the bank the amount of the deficiency.

In some cases for a variety of reasons mortgage companies end up accepting less than the total balance due on the home. The home owner might enter a short sale of the property in which the mortgage company agrees to accept the sales price, after expenses, even though they will end up receiving less than the total balance due on the note. The debtor might give the mortgage company a deed in lieu of foreclosure, which allows the bank to reacquire the property without going through the lengthy foreclosure, but which also cancels all debt due under the mortgage. Or the court may not enter a judgment against the homeowner for the deficiency leaving the debtor with no legal obligation to pay the funds back.

In these case however the borrower may still not be out of the woods, because Section 108 of the Internal Revenue Code provides that cancelled indebtedness is taxable income for the debtor.

With the wave of foreclosures foreclosures  created by the recent meltdown in the housing market Congress granted some relief for mortgage debt discharged through 2012, and a homeowner who meets the qualifications of the temporary law can avoid paying tax on a forgiven mortgage debt.

The first qualification is that the mortgage must be on the taxpayer’s principal residence. A debtor cannot claim this exception for investment property or for a vacation home. In addition the exception is limited to home acquisition indebtedness up to $2,000,000 (or $1,000,000 in the case of a married individual filing separately). Acquisition indebtedness includes refinancing of home acquisition indebtedness to the extent the refinanced amount does not exceed the original indebtedness.

Example


Herman Highflyer buys a house in Libertyville, Illinois for $450.000 in 2000 putting $50,000.00 down. During the next few years the house appreciates in value, and in 2005 he takes out a home equity loan for an additional $400,000. In 2010 Herman loses his job and when he is unable to pay his mortgage the bank agrees to allow a short sale in which they accept $600,000 in settlement of the outstanding note. The $200,000 debt forgiveness will not qualify for the special rule on discharge of mortgage debt, because it exceeds Herman’s acquisition indebtedness.
There are other exceptions to the cancellation of indebtedness income though, most notable bankruptcy and insolvency, and with luck Herman will qualify for one of these exceptions and will still be able to avoid adding $200,000 to his taxable income.

Does Bankruptcy Create Taxable Income

Section 108 of the Internal Revenue Code provides that as a general rule the cancellation of indebtedness creates taxable income.

Example

 Holly Hamilton has missed a number of payments on her credit card issued by the Thirteenth National Bank of Mundelein Illinois. With the higher interest rates that kick in, when one fails to make minimum credit card payments, she soon has rolled her debt up to $20,000. When the credit card company offers to settle for half this amount, Holly quickly borrows $10,000 from her mother and pays off her debt. She assumes this is the end of the matter and is quite pleased with the result. However, at the end of the year the Thirteenth National Bank sends a 1099 form to the Internal Revenue Service reporting that Holly has $10,000 of cancellation of indebtedness income, and though the bank also sends her a copy of the 1099, she does not understand the document and ignores it when she prepares her annual tax return. Later that year Holly receives a letter from the Internal Revenue Service demanding several thousand dollars of taxes and penalties.

There are however several exceptions to this general rule, and one of these exceptions is  bankruptcy.  If Holly had gone to a bankruptcy lawyer and had received a discharge of the $20,000 debt in a Chapter 7 bankruptcy she would have no tax liability on the transaction.

Another exception provides that the taxpayer will not recognize taxable income on cancellation of indebtedness to the extent he or she was insolvent at the time of the cancellation of indebtedness. A person is insolvent if immediately before the cancellation of the debt the person’s liabilities exceeded the fair market value of his property. In Holly Hamilton’s case the fact that she had to borrow the money from her mother to settle her credit card debt for fifty cents on the dollar is a strong indication that she was insolvent, and she may well be able to avoid the tax liability, even if she does not file bankruptcy.

One thing to keep in mind is that, since the bank reported the income to the Internal Revenue Service, the government will still demand the tax unless Holly claims the insolvency exception on her tax return. She does this by completing form 982 and submitting it with her 1040. Creditors should not report the taxable income to the government in the case of bankruptcy discharge; however, sometimes they do, in which case the debtor also needs to claim the exception when she files her tax return. :

Are Income Taxes Dischargeable in Bankruptcy

Individuals with financial problems frequently fall behind in paying their income taxes for a number of reasons. People, who are self employed, may be short on funds, when their estimated tax payments are due. Or if they are subject to wage withholding, they may be unable to pay any additional balance due, when they file their annual tax returns. One mistake individuals sometimes make, which compounds this problem, is withdrawing funds from retirement accounts in an effort to catch up on their late bills. Unfortunately withdrawing from retirement accounts creates taxable income, and if the debtor is under the age of fifty-nine and a half he or she will probably also be subject to a ten percent penalty for premature withdrawal.
A bankruptcy can discharge income tax liability, but there are a number of circumstances which will prevent the taxpayer from receiving a discharge, and if you owe income taxes you need to discuss the problem with your bankruptcy attorney, so he or she can properly advise you how the rules apply in your case.
The general rule is that income taxes will be discharged, if they are more than three years old provided the tax return was timely filed. The three year period is counted from the due date of the tax return.
Example: Orrin Oxford from Libertyville, Illinois decides to file a bankruptcy on April 1, 2011, and among his debts is $5,000.00 of unpaid Federal Income Taxes for the year 2007. He may assume that 2011 is four years after 2007, and he will receive a discharge for the taxes. However, the due date for his 2007 tax return was April 15, 2008, and his filing date for the bankruptcy, April 1, 2011, is less than three years later. His bankruptcy attorney will no doubt advise Orrin to postpone filing until the second half of the month, so he can obtain relief from the Internal Revenue Service along with the rest of his creditors.
The above example assumes that the debtor filed his 1040 on time. If a taxpayer fails to file a tax return, the taxes will not be discharged in bankruptcy, even if they are more than three years old. If the tax returns are filed late, the bankruptcy must occur at least two years after the taxpayer filed the return to allow a discharge.
Even if the taxpayer files taxes on a timely basis, the taxes will be nondischargeable, if fraud was involved, and the Internal Revenue Service sometimes takes an unreasonably aggressive approach in opposing the discharge on the ground of fraud. The government does not do particularly well in court, when debtors challenge such claims, but unfortunately many people in bankruptcy cannot afford to take the issue to court.

Get Ready For Return of Estate Taxes

It is now October 31, 2010, and two months from today The Economic Growth and Tax Relief Reconciliation Act of 2001 rides into the sunset. As any estate planning attorney would have told you at the time the law passed, The Economic Growth and Tax Relief Reconciliation Act of 2001 was thelegislation in which Congress abolished the Death Tax. The law provided that the Federal Estate Tax would phase out over the next decade, and the $1,000,000.00 estate tax exemption would gradually grow in size until it reached $3,500,000.00 in 2009 and became unlimited in 2010.

See Is There Any Such Thing As Estate Taxes

The only problem was that technically the change was not permanent. In order to meet the definition of being revenue neutral Congress had to provide that the law would end after a ten year period, and in 2011 the $1,000,000 exemption would return, leaving anyone dying after this year subject to the dreaded Death Tax.

Of course everyone realized nine years ago that the abolition of the Federal Estates Tax would really be permanent. They knew that sometime in the interim Congress would remove this ridiculous little sunset provision, and no one would ever really have to worry about Death Taxes again.

A funny thing happened though after the 2001 law passed. The economy suffered some setbacks, and the budget surplus, which the big supporters of the abolition of estate taxes believed would go on forever, turned into a rapidly growing deficit. Funding a permanent change began to look more difficult, and when all was said and done Congress never followed through.

There are some, who are still predicting a last minute action by Congress, but even most of the optimists only expect a $3,500,000 exemption. What is certain is that a lot more individuals dying after January 1, 2011 are going to be subject to Estate Taxes and Estate Planning has now become urgent.

Giving Away Property Before Bankruptcy

The rational for allowing people to file bankruptcy is that sometimes one’s debts grow so large that it becomes impossible to ever repay what he owes, and when an individual files a Chapter 7 Bankruptcy he expects to receive a discharge of most of his debts. In most cases in a Chapter 7 Bankruptcy no payment is made toward the debt; however, in some situations an individual owns property that is more valuable than the exemptions allowed by the bankruptcy law.

 When that happens the bankruptcy trustee will sell the property, pay the debtor the amount of the exemption, and use the balance to make partial payments to the creditors.

Under Illinois law for example an individual is entitled to a $2,400.00 exemption for a car, and a $4,000.00 general personal property exemption, sometimes called the wild card exemption. Thus if an Illinois resident who files a Chapter 7 Bankruptcy owns a $10,000.00 car and listed stock worth $12,000.00 the bankruptcy trustee will sell this property to pay the creditors.

People in this situation sometimes ask their bankruptcy attorney, if they can give away the property to a friend or relative before they file and thus protect it from the trustee.

The answer is no!

The law provides that, if an individual gives away property, while they are unable to pay their debts, it is considered a fraudulent transfer, and the bankruptcy trustee can recover the property from the new owner. The same rule would apply, if the debtor sold the property to a friend or relative for a nominal amount.

The fraudulent transfer rules rule can be applied for transfers made up to four years before the bankruptcy is filed, although they become less likely to come into play when a longer period has passed. This is because a key element of a fraudulent transfer is that the debtor had to be unable to pay his debts at the time that he gave away the property, and when the gift is made two or three years before the bankruptcy filing this is less likely to be the case.

The Foreclosure Crisis Continues to Fester

From the current news one has to wonder if the foreclosure crisis is going to grow worse before in grows better.


According to RealtyTrac Inc. lenders took over 102,134 properties in foreclosures in September 2010, which makes last month the highest monthly total of foreclosure sales, since RealtyTrac Inc, began tracking the data in 2005. Furthermore, August had also broken the previously standing record for foreclosure sales. Sales of properties in foreclosure now amount to approximately one third of U.S. transactions, and this is despite the fact that mortgage companies have realized that they are creating a glut in the market and slowed down the foreclosure procedure in many cases.

Meanwhile on Wednesday October 14, 2010 the attorneys general of all 50 states announced plans to investigate whether banks and mortgage companies have properly handled foreclosures sales on thousands of homes. This investigation has more potential consequences though than merely causing further headaches to the mortgage industry. If these foreclosures sales were done improperly the next question to arise will be can the sales be set aside? And if the answer is yes thousands of buyers of foreclosed homes may not have valid title to the property. Title companies are starting to show reluctance to issue title policies on foreclosed properties, and the uncertainly in this huge portion of the real estate market is thought to be responsible for a large midday dip in the stock market on Wednesday.

Unfortunately, this uncertainty in the foreclosure process can only serve to weaken the housing recovery, as many home buyers and investors will no doubt become leery about purchasing properties that have been through the foreclosure process, and with new potential losses for the mortgage industry the lenders might grow even more reluctant to issue new mortgages.

See Stopping Home Foreclosures

Supreme Court Reviews Allowance for Car Ownership Expense in Bankruptcy

The United States Supreme Court heard Oral Arguments yesterday in the case of Ransom v. FIA Card Services N.A. The case concerns the expense allowance a debtor receives in the means test for ownership of a vehicle. The means test is a calculation that was added to the bankruptcy law in 2005. It looks at a household’s income and expense and determines if an individual has enough disposable income to pay back part of his or her unsecured debt.

 The results of the means test can require an individual to file a Chapter 13 Bankruptcy in which he or she will make monthly payments for five years that will pay off part of the debts, rather than being allowed to file a Chapter 7 bankruptcy which would bring a discharge in about three months. Also if the individual files a Chapter 13 the means test will determine how much the Chapter 13 plan must pay toward his or her unsecured debts.

The means test includes a vehicle ownership expense for up to two vehicles owned by a household. Currently for Debtors living in Northern Illinois the allowance is $496 a month for each car. In the last five years since the means test was added to the law, courts have disagreed on an important question. Some courts have held that in order to take an ownership allowance the debtor has to be making payments on the car. Other courts have held that the debtor may take the allowance even if the vehicle is paid for. The question is significant because at $496 a month, it can make a difference of $29,760 in the amount the debtor will have to pay over the life of his Chapter 13 plan.

The Supreme Court has now accepted a case with this issue, Ransom v. FIA Card Services N.A, and on October 5, 2010 the court heard arguments on the issue. Once the court issues its opinion it will become the law in all jurisdictions. Needless to say we are anxiously awaiting the results..

Must a Husband and Wife File a Joint Bankruptcy. Part II

In a prior post we pointed out the while a husband and wife may file a joint Chapter 7 Bankruptcy or a joint Chapter 13 Bankruptcy, the United States Bankruptcy Code also allows either spouse to file an individual bankruptcy. However, in many cases it would make no sense for a married couple to file an individual bankruptcy, because either the debts are in joint names or each party has substantial debts in his or her own name, and by filing a joint bankruptcy both parties can receive a discharge from their debts.

One reason a couple may not want to file a joint bankruptcy though occurs when the parties have a high enough income that the bankruptcy law will require them to file a Chapter 13 bankruptcy, but they are not that much past the limit. In a Chapter 13 bankruptcy the debtor is required to make monthly payments over a plan period which usually lasts for five years. How large the payments will be is usually based on how much disposable income the household has available (the formula contained in the Bankruptcy Code known as the "means test"), and in the majority of cases the total plan payments add up to substantially less than the amount of debt that the Bankruptcy Court will discharge.

In figuring the amount of income that is available the law allows certain deductions for household expenses, and one of the allowed expenses is the debt that the nonfiling spouse will have to pay off over the next five years. In other words in many cases, if one spouse stays out of the bankruptcy the plan payments will go down by the debts payments that spouse has to make over the next sixty months. In some cases the total household debt payments will stay the same either way, and the spouse who does not file will avoid having a bankruptcy on their credit report. Or after allowing the deduction for non discharged household debts, the spouse filing bankruptcy will end up qualifying to do a Chapter 7 bankruptcy rather than a Chapter 13 bankruptcy.

Of course no one will know whether either of these advantages will apply in their case until their bankruptcy lawyer performs a rather complication to determine how the means test will work in their particular case. The bankruptcy lawyer is required to compute the means test in every individual bankruptcy though, and he or she should be able to advise the debtors before they file whether or not a husband and wife is better off filing a joint bankruptcy

Home Foreclosures Are Taking Longer

As an Illinois Bankruptcy Lawyer I have definitely noticed that mortgage companies have not been moving nearly as fast as they use to, when they foreclose on home.

The reason for this slow down is that with the burst of the housing bubble a huge number of homeowners have fallen behind in their mortgage payments and the volume of problem loans to deal with has slowed down those who process the collection actions. Banks of course lose money on most foreclosures, and while you would never realize it from dealing with their collection departments or their loss mitigation departments financial institutions would prefer to avoid a foreclosure if possible. Thus it is not surprising that with so many loans going bad, which are costing the mortgage companies tremendous losses, the lenders in many cases are postponing court action.

Under Illinois law a foreclosure sale cannot take place for at least 210 days after the bank serves the homeowner with a summons for the foreclosure law suit. After the sale date the mortgage company needs to obtain a possession order from the court, and the possession order allows the owners to remain in their home for another 30 days. The service of the summons only occurs after the mortgage holder files a foreclosure suit in court. Up until the last couple of years my advice as a bankruptcy lawyer has been to assume that the bank will file the lawsuit after the homeowner has missed three monthly mortgage payments. Thus we would figure a homeowner had about a year after he or she stopped making payments before they would have to leave the home.

For most homeowners this is no longer the case though, and I am encountering numerous individuals who are still in their homes well over a year after they have quit making mortgage payments. In fact according to the Wall Street Journal mortgage companies have not yet foreclosed on a quarter of homeowners who have gone for two years without making a mortgage payment.

Must a Husband and Wife File A Joint Bankruptcy

As with tax returns married couples have the option of filing a joint bankruptcy petition, and when they file a joint bankruptcy both husband and wife will receive a discharge of their debts. However, as their bankruptcy attorney will point out to them there is no requirement that they file a joint bankruptcy, and a married person is free to file an individual bankruptcy.

Whether a married couple should file a joint bankruptcy is another question, and before offering advice on this point the bankruptcy attorney will have to look at the circumstances in each case. When the debts are all in joint names the answer is pretty obvious that a joint bankruptcy will work better. If one spouse files the bankruptcy court will discharge his or her liability for the debts, but the creditor will be free to collect the debt against the other spouse who does not receive a bankruptcy discharge. Of course the each spouse could file their own individual bankruptcy, but then the family will incur the extra expense of two separate legal proceedings.

One exception to this principal might be if the only significant joint debt is a mortgage in default, and either the husband or wife wishes to file a Chapter 13 bankruptcy to stop the foreclosure. The spouse filing can payback the arrearage through a bankruptcy plan, and at the end of the term of the plan the bankruptcy court will fully reinstate the mortgage. This can backfire however, if unexpected circumstances keep the debtor from making the required payments. In this case the Chapter 13 bankruptcy will fail, and the foreclosure will proceed. When this happens the debtor will frequently convert the Chapter 13 bankruptcy to a Chapter 7, which will discharge the debt that arises from any deficiency in the foreclosure sale. However, the mortgage company will still be able to pursue the other spouse to collect the deficiency unless that person files his own individual bankruptcy.

The other simple situation that calls for an individual petition is when all the debts are in the name of either the husband or the wife. In that case there is no benefit to the other spouse filing bankruptcy, and the one with the debts should file an individual Chapter 7 Bankruptcy or Chapter 13 bankruptcy. The question becomes more complicated though when the spouses have separate debts.

Will My Employer Know That I Filed Bankruptcy

Some people hesitate to file a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy, because they are concerned that their employer will discover that they have filed a bankruptcy petition, and this action will prove harmful to their career. Sometimes they will even put off visiting a bankruptcy lawyer to consult upon the benefits of the action.

When individuals bring up this concern, their bankruptcy lawyer will usually point out that an employer would be breaking the law, if they discriminated against one of their workers who filed either a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy. This information puts most people at ease; however, some individuals to not find that this explanation offers enough comfort. They might worry that once their boss learns about the filing, he may still want to fire them, and he will look for some other explanation for the termination that will disguise the true motive. Or the concerned individual might work for a small company, who may not retain an employment lawyer, whom they can consult before they decide to let the employee go, and the management might not even realize they are breaking the law.

It does not seem likely that this penalization with a disguised motive would actually occur, but it is also hard to be positive that it could never happen. What the bankruptcy lawyer can offer as additional assurance though, is the fact that the debtor’s employer is unlikely to know that a member of his staff has filed a bankruptcy. The court does not notify an individual’s place of employment, when he or she files bankruptcy, and it is unlikely the company will discover the information through other sources.

One exception of course is when an employer is already garnishing a worker’s wages because of a court judgement against the employee. In that case the bankruptcy lawyer will have to notify the payroll department that the worker has filed bankruptcy in order to stop the garnishment. However, this would be a case, where the employer will already know that the worker has financial problems, and if anything the company should be happy that it no longer needs to go through the extra paperwork that the garnishment requires.

One final note on this subject is that bankruptcy is a public record, and if someone wanted to know, if you filed a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy they could go to the court and check the records. However, finding those records is not an easy task, and it is hard to believe that anyone would make that effort unless they already strongly suspected the bankruptcy. Certainly a well advised employer would not check for his employee’s bankruptcy filing for the simple reason that such an effort on a company’s part could be taken as circumstantial evidence that they intended to break the law by penalizing the bankrupt employee.

Medical Bankruptcy

 Health problems often lead to financial problems, and most of us have friends or  relatives who lost everything when they became ill. Besides the doctor and hospital bills a number of other costs can accompany illness, such as lost income when one is unable to work, and the exorbitant premiums insurance companies will charge for health coverage after an individual becomes sick. Studies indicate that over half of all individual bankruptcy filings in the United States are the result of medical setbacks, and everyone, who listened to the Health Care Reform debates earlier this year is aware that the routine acceptance in this country of individuals falling into poverty when they become ill has become a national scandal.


People who find themselves falling into debt as a result of illness often say they want to file “medical bankruptcy” with the general idea that the procedure will free them of various doctor and hospital charges, which they do not have the income to pay, and it is not surprising that the term medical bankruptcy has come into everyday use.



However, as a bankruptcy lawyer will tell you the bankruptcy code does not contain the term “medical bankruptcy,” and people who are filing bankruptcy because of illness face the same rules as everyone else. This includes the requirement that they participate in credit counseling programs designed to help people who have trouble keeping track of their credit card debt, and to me it seems rather insulting to subject a person who has just gone through a $40,000.00 operation to lectures that imply, that if she had just been a little more careful with her charge cards all her problems would evaporate with the dew as soon as the sun comes out.



There is some movement in Congress to change this, but it does not appear to be moving very quickly. The Medical Bankruptcy Fairness Act was introduced on February 4, 2009.  However, nineteen months later the bill does not look like it will become law anytime soon. The Act would provide such relief as allowing an individual filing medical bankruptcy to keep a  home worth up to $250,000 rather than having the home taken away to pay his medical bills.

The proposal would also remove the requirement for many bankruptcy filers that they file a Chapter 13 bankruptcy, which will require him to commit his entire disposable income for a five year period toward paying his medical debt before he can receive a discharge.

Keeping Your Car In Bankruptcy



One of the most important questions for many people, when they consult with a bankruptcy lawyer is whether they will lose their car, if they file a bankruptcy. This is not surprising, since our country has for the most part failed to maintain public transportation at a level that which can offer reasonable services in most cases, and owning a vehicle has become a necessity of life. Most workers in fact have no choice but to drive to work, and if the bankruptcy court were to take away a person’s car he or she would be unable to earn a living.

In most cases individuals, who file bankruptcy, do keep their cars; however, this is not an absolute rule. In a Chapter 13 bankruptcy the bankruptcy plan will usually provide for the debtor’s payments to satisfy vehicle loans, and the debtors will then keep the cars. In a Chapter 7 bankruptcy, the trustee can sell a debtor’s vehicle and apply the proceeds to pay the creditors, but this will only happen, if the trustee can sell the car for more than the value of the exemption, which the law allows.

Thus it is important for the bankruptcy lawyer to examine what is going to happen under each set of circumstances, and give appropriate advice to the clients.

Under Illinois Bankruptcy Law every individual is entitled to a $2,400.00 exemption on one vehicle. Everyone is also entitled to a $4,000.00 general personal property exemption, which the debtor can apply to her automobile, if she does not need this exemption to protect other property. Thus a person can exempt a car worth up to $6,400.00.

In figuring out how much of an exemption is needed to retain an automobile, you only need to consider the equity in the vehicle. Thus a debtor, who owns a car worth $20,000.00, but who owes $18,000.00 on the car loan used to purchase the vehicle, only has to worry about the $2,000.00 value of his or her interest in the car, and the $2,400.00 vehicle exemption will be sufficient to keep the vehicle.

When a married couple files a joint Chapter 7 Bankruptcy they may be able to use both of their exemptions on a single vehicle and retain an automobile worth $12,800.00. In order to make this election however, they would have to own the car jointly. Unfortunately, even in the enlightened twenty-first century the American tradition of titling the family car in the husband’s name has not totally died out, and following this custom sometimes makes it impossible for a couple to keep the automobile.

Is There Any Such Thing as Estate Taxes

Nine years ago Congress provided for a gradual phase out of Federal Estate Taxes. The idea was  to increase the estate tax exemption from the $1,000,000 available at the time the law passed to  3,500,000 in 2009, and to create an unlimited exemption, so that estate taxes would disappear in 2010.

The problem is that congress wanted to tell their constituents that the change would not cost the government any revenue, and in order to fall within the voodoo economics formula, which Congress follows in making such claims, our lawmakers included a sunset provision that would kick in after 10 years. In other words in 2011 the estate tax would return to the time space continuum from which it sprang, and the exemption would decrease to $1,000,000 amount that existed before Congress passed the law.

At the time everyone assumed that Congress would make the abolition of estate taxes permanent long before the sunset provision would take affect. However, as of September 2010 Congress has still done nothing, and the Federal Estate Tax burden is scheduled to jump for anyone dying on or after January 1, 2011