Wage Garnishment And Bankruptcy

As a bankruptcy attorney I frequently see individuals, who have had judgments entered against them in court, and who are having their wages garnished to pay the judgments. A judgement creditor can garnish up to 15% of a person’s wages in the state of Illinois.

Bankruptcy will stop the garnishment of wages, since the bankruptcy creates an automatic stay that makes it illegal for creditors to collect debts. However, the garnishment will only stop as of the date when the bankruptcy is filed. Unfortunately, a creditor is allowed to keep any wage garnishments that occur before the bankruptcy. That is why the time to consider a bankruptcy should be when the lawsuit is filed or at least when the judgment is entered. If an individual waits to start when they receive the notice that their wages are being garnished it is often difficult to complete the bankruptcy petition before the first wage deduction is taken. Also if an individual is already having his wages garnished, he may have a harder time finding the money to pay for his bankruptcy.

Inheritances During Bankruptcy

Although it is uncommon, occasionally an individual inherits property right before or right after he files bankruptcy, and the question arises whether the inheritance is subject to creditor claims. As a bankruptcy lawyer I usually have to deliver the unappreciated news in these situations that the answer is yes.

In Illinois an individual filing bankruptcy has a $4,000.00 wildcard exemption that can be applied to inheritances, but the rest is usually subject to creditor claims. If the money is inherited before bankruptcy the trustee may take the remaining balance, and if the inheritance was spent or given away before the filing, you can expect the trustee to scrutinize, if the money was disposed of improperly. If someone inherits property within 180 days of filing the bankruptcy, it is also subject to creditor claims.

Keep in mind that the crucial date is when the decedent dies. If the death is within 180 days of the bankruptcy filing, the inheritance will be subject to creditor claims. It does not matter that the probate of the estate does not begin until after the discharge or whether it takes several years to distribute the funds to the debtor.

Reaffirmation on Furniture Loans

When an individual files a Chapter 7 bankruptcy, they can enter an agreement with a secured creditor to reaffirm the debt. This means that the filer will be liable for the debt even though it otherwise would be discharged in bankruptcy. Since the purpose of bankruptcy is to get a fresh start from debt, as a bankruptcy lawyer I tend to discourage individuals from signing reaffirmation agreements. There are reasons why an individual will want to reaffirm a debt though. A secured creditor can refuse to allow a customer to keep property, if they do not reaffirm, and there are some car lenders who enforce this rule. Also a reaffirmed debt will show on your credit rating as being paid.

One secured debt which I really discourage people from reaffirming are furniture loans. This is because furniture depreciates rapidly from its retail value, and it is seldom worth what is owed on the loan. Furthermore, furniture lenders know the repossessed merchandise has little value, and that after bankruptcy they can no longer try to collect the debt, leaving repossessing the furniture as their only option. Thus when a furniture lender asks for a reaffirmation agreement, they will often accept a fraction of the amount owed in settlement, if you make them the offer. I have also had a number of clients, who have decided not to offer anything to the lender and to take a chance on repossession. As far as I know none of my clients have lost any furniture by taking this approach, since the lenders did not think the expense of doing a repossession was worth it.

Bankruptcy Means Test For Joint Debtors Living Apart

The bankruptcy means test is the mathematical formula that was inserted into the bankruptcy law in 2005 to determine how much of their debts individuals filing bankruptcy should pay back from their income ,when they file bankruptcy. If the available income shown under the means test is low enough the debtors can file a Chapter 7 bankruptcy, which often means they do not have to pay back their unsecured debts. If the means test shows a higher income the individuals will have to file a Chapter 13 bankruptcy, which requires them to make monthly payments for five years based on the amount the means test says is available.

The means test is computed by taking a debtor’s average monthly income and subtracting out what the bankruptcy law allows as expenses. For most expenses such as food, clothing and utilities the law allows a standard allowance based on the household size. For certain expenses such as taxes, child support, and medical the debtors may use their actual expense.

One problem that the 2005 legislation did not specifically address is what happens, when a husband and wife who are separated file a joint bankruptcy. The formula contains no provision for extra expenses such as duplicate rent or utilities that arise in this situation. And of course realistically, if the law says you can afford to make payments based on the expenses of a single household and you actually have to pay for two households, the plan is not going to work.

The means test however does allow extra deductions for special circumstance, and some separated joint filers have claimed the expenses of a second household as a special circumstance on the means test. This position has had some success in the courts.

Automatic Stay For Co-Debtors In Bankruptcy

When a person files bankruptcy an automatic stay goes into affect by law. This means that a creditor cannot take any action to collect a debt against the individual in bankruptcy. The creditor may not take the debtor to court, garnish his wages, send letter demanding payment, or make collection calls on the phone. The automatic stay though does not generally apply to a co-debtor. Thus when a married couple is jointly liable on most of their debts, it seldom does much good for one of the spouses to file a bankruptcy alone. The creditors will merely go after the spouse, who did not file bankruptcy.

There is a limited automatic stay for co-debtors in a Chapter 13 bankruptcy . The automatic stay will apply to consumer debts signed by a co-debtor in a Chapter 13 bankruptcy and prevent the creditors from going after the debtor’s spouse or other co-debtor. There are several exceptions to this rule though that waters down the protection it supplies. Probably the biggest exception allows the creditor to have the automatic stay lifted, if the bankruptcy plan does not call for paying 100% of the debt. Since most Chapter 13 bankruptcy plans call for paying less than 100% of the debts, this exception will frequently apply.

Substitute Notice of Creditors in Bankruptcy

At the end of 2013 the United States 7th Circuit Court stopped a creditor from reopening a discharged bankruptcy case, because the debtor failed to notify the creditor directly; In Re Herman 737 F 33d 449 (7th Circuit 2013). In this case the debtor listed the creditor on his bankruptcy petition showing an attorney for the creditor, who was not representing the creditor in the bankruptcy, as the address for notifying the creditor. The appellate court felt that this was sufficient notice to give a reasonable opportunity to take action and refused to reopen the case to allow the creditor to object.

As a bankruptcy attorney I of course have seen many cases where it is difficult to find an address to notify a creditor, and it is always good to see the court accept a reasonable effort, even if the address used for a creditor does not end up creating the best notice available. There are too many cases of creditors, who have moved or have gone out of business, or in the more shady category are purposely making it hard for their disgruntled customers to find them. The problem has been aggravated by advancing technology. Many people now pay loans through web sites that do not bother to provide an address for the lender. Unfortunately, the bankruptcy court still sends out notices of bankruptcy by mail, which requires a mailing address, rather than a website.

Surrendering A House During Foreclosure

While most people, who have fallen behind in their mortgage payments, would like to stay in their houses for as long as possible, there are some homeowners, who would like to just leave and put that all behind them. As a bankruptcy attorney I have seen a number of clients in this position, and unfortunately they cannot just send the keys to the mortgage company and have everything over with. The problem is even, if the homeowners move out they can still have potential liabilities. Someone could be injured on the property and sue for damages, or their local village may start citing them for violating ordinances by not keeping the property maintained and impose fines for these offenses.

The homeowner does not escape liability until the title to the property transfers in the foreclosure sale. In Illinois a foreclosure sale cannot take place until 210 days after the homeowner is served with a summons for the foreclosure complaint. The process frequently takes longer than the minimum, and there is really nothing a person can do, if their mortgage companies take their time in pushing a foreclosure through the court. There are legal procedures, which allow the homeowner to surrender the property to the mortgage company, such as a deed in lieu of foreclosure, but these require the mortgage company consents, and homeowners asking for deeds in lieu of foreclosure usually become frustrated by the failure of anyone in the mortgage company to get around to responding.

Although it is not always feasible, I usually believe the best advise for homeowners, who are going through foreclosure, is to just stay in the house as long as possible. They are receiving free rent during what frequently turns out to be a very long time. Furthermore, they are not doing anyone any favors by moving out early. Rather this just leaves the mortgage company with vacant property subject to damage by vandals or the weather during the many months it takes them to get around to finishing the foreclosure.