Commercial Banking, Collections, and Bankruptcy

What is bankruptcy?

Bankruptcy is a court proceeding that is governed by the federal law known as the "Bankruptcy Code." The Bankruptcy Code is aimed at providing people or other entities in financial distress with relief from some or all of their debt. Bankruptcies are administered through a separate federal court division called the United States Bankruptcy Court.

Is there more than one kind of bankruptcy?

Yes. For individuals, there are two main types of bankruptcies that can be filed: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 cases are also referred to as "liquidation" cases, while Chapter 13 cases are commonly referred to as "debt adjustment" or "wage earner" cases. Individuals may also be eligible for a Chapter 11 bankruptcy, which allows the debtor to propose a plan for reorganization to pay creditors overtime, but Chapter 11 is normally used to reorganize a business. Farmers and fisherman can also file a separate type of bankruptcy available only to farmers under Chapter 12. The word "Chapter" is simply a reference to a chapter number in the Bankruptcy Code.

Can spouses file a bankruptcy together?

Yes. The Bankruptcy Code allows spouses to file jointly for bankruptcy. The question of whether you and your spouse should file a bankruptcy together depends on whether you both are liable for the debts involved. You should remember that filing bankruptcy generally protects only the person who files for it.

Eligibility to file a Chapter 7 bankruptcy case

In order to be eligible for a Chapter 7 case, you must receive credit counseling from an approved agency within 180 days prior to filing. When you file, you are required to provide the court with a certificate from the agency describing the services you received along with a copy of any debt repayment plan you and the agency may have developed. After you file, you will also have to complete an instructional course concerning personal financial management in order receive a discharge. Classes are run by independent agencies and require additional costs. A list of accredited credit counselors can be found at the United States Trustee's website, http://www.justice.gov/ust/credit-counseling-debtor-education-information.

What happens when I file a Chapter 7 case?

A bankruptcy proceeding is initiated by filing a petition with the bankruptcy court. When you file for Chapter 7 liquidation, the petition operates as an automatic stay, which generally prevents creditors from pursuing debt collection actions against you unless the bankruptcy judge approves it first. The automatic stay goes into effect immediately upon filing the petition; no court hearing or approval by a judge is necessary. When the case is filed, the United States trustee for your judicial district appoints a trustee to review your financial affairs and administer your case. The appointed trustee has the power to liquidate any asset you own that is not by law exempt from collection or subject to a lien in order to pay your creditors.

The Bankruptcy Code divides debts into two general categories: secured and unsecured. Unsecured debts are debts that are not secured by a lien on property, or in other words are not backed by collateral. The most common type of unsecured debt is credit card debt. If the court issues you a bankruptcy discharge, you are relieved from liability for all of your dischargeable unsecured debts. Secured debts are debts that are secured by a lien on property. For example, if you have mortgage, the mortgage lender has a lien on your home and thus your mortgage is a secured debt. A discharge does not relieve you from your obligations to pay your secured debts and thus creditors may still have the right to take the property securing the lien if you do not make your payments.

What happens to the property I own that is subject to a lien?

In some cases, the Bankruptcy Court can set aside or reduce a lien on your property. Additionally, individuals who want to keep the property secured by a lien can enter into reaffirmation agreements with the secured creditors. Under a reaffirmation agreement, the debtor promises in writing to continue to pay the amount owed to the creditor despite the bankruptcy and in return, the creditor agrees to not seize the secured property so long as the debtor continues to make the necessary payments. All reaffirmation agreements must be filed with the bankruptcy court. If you default on your payments under a reaffirmation agreement, the creditor can hold you liable on any deficiency and repossess the secured property accordingly.

What types of property can I keep if I file bankruptcy?

Each individual who files a bankruptcy is entitled to keep any property that qualifies for an exemption under either federal or Illinois law. For some types of property, such as family pictures, necessary wearing apparel, worker compensation benefits, qualified retirement plans, IRAs, and life insurance, the value and amount of property an individual can claim as exempt is unlimited. In other cases, however, the equity an individual can claim as exempt is limited by a fixed dollar amount. Common examples of such exemptions include:

• Your personal residence (equity of $15,000, or $30,000 for spouses filing jointly);
• Compensation for personal injury claims ($15,000);
• Motor vehicle (equity of $2,400 for each individual owner);
• Tools or books used in your occupation ($1,500).

Illinois law also gives each individual the right to exempt up to $4,000 in equity for any other personal property, including cash or money in the bank. If a husband and wife file jointly for bankruptcy, each spouse is entitled to claim these exemptions as well.

Which of my debts are not discharged in Chapter 7?

While a discharge relives you of your obligations to pay most of your debts, not all debts are dischargeable in a Chapter 7 bankruptcy. Nondischargeable debts include, for example, alimony and child support obligations, certain taxes and fines, certain education loans, debts for death or personal injury caused by the debtor's operation of a vehicle while intoxicated from alcohol or other substances, and debts you fail to disclose properly to the bankruptcy court when filing your petition. Some debts that are typically dischargeable can be excluded from discharge if the specific creditor requests that the bankruptcy court declare the debt nondischargeable. These debts include debts for money or property obtained by false pretenses and debts for willful and malicious injury by the debtor to another entity or to the property of another entity. If the bankruptcy judge grants the creditor's request, the debt owed to that creditor will not be discharged.

What happens when I file a Chapter 13 case?

In a Chapter 13 case, you do not have to liquidate assets in order to pay your creditors; instead, you develop a plan to repay all or a portion of your debts over time, which allows you to keep most or all of your property. During the period the plan is in effect, you make your regular payments to the trustee assigned to your case who, in turn, distributes the money to your creditors. The applicable commitment period for payment under a Chapter 13 plan is three years for debtors whose family's current monthly income is less than the state median for a family of the same size and five years if it is greater. Your Chapter 13 plan must pay your unsecured creditors at least as much as they would receive if your nonexempt assets were liquidated under Chapter 7. Also, your plan payments for unsecured debts must be equal to your disposable income (the difference between your net monthly income and your court approved monthly expenses). In other words, you cannot retain a cash reserve each month.

In order to be eligible to file for Chapter 13 bankruptcy, you must have regular income and meet certain debt limitations for your unsecured and secured debts (unsecured debts must be less than $383,175 and secured debts must be less than $1,149,525 as of 2015). Individuals, sole proprietorship businesses, or spouses can file a Chapter 13 Bankruptcy. Just like a Chapter 7 case, filing a petition for Chapter 13 bankruptcy with the bankruptcy court automatically stays most debt collection actions against you. You must file your repayment plan either with your petition or within 14 days after filing your case.

What are the reasons a person would file a Chapter 13 case instead of a Chapter 7 case?

There are a few advantages to filing a Chapter 13 case over a Chapter 7 case that you should keep in mind if you are considering bankruptcy. For example, you might have more equity in your home than can be protected by the exemption for real estate in a Chapter 7 case. Filing for Chapter 13 bankruptcy automatically stays a foreclosure proceeding, giving you time to incorporate into your plan a way to cure your delinquent mortgage payments that could allow you to keep your home. Furthermore, Chapter 13 bankruptcy has a special automatic stay provision that prohibits collection actions against co-debtors (individuals liable for a debt along with the debtor) for consumer debt. Also, whereas you are required to surrender all your nonexempt assets for distribution under Chapter 7, so long as you successfully complete all the payments under your Chapter 13 plan, your nonexempt assets are protected and do not have to be turned over to creditors. Before filing for bankruptcy, you should contact an experienced bankruptcy attorney, who can conduct a means test to determine your eligibility to file a Chapter 7 or Chapter 13 bankruptcy.

If I file bankruptcy, how will it affect my future credit and my job?

Different people have different experiences obtaining credit after they file for bankruptcy. As a general rule, most people find it more difficult to obtain long-term credit, such as a home mortgage, shortly after a bankruptcy has been filed. For other types of credit, however, experiences vary depending on other factors. The Bankruptcy Code prohibits your employer from discharging you or discriminating against you solely because you have filed a bankruptcy case. A bankruptcy can remain on your credit report for up to 10 years, but many people are able to raise their credit score to a relatively good level within a few years after bankruptcy.

If I own a home, will I lose it if I file a Chapter 7 or a Chapter 13 case?

The answer to that question depends on many factors, such as the equity in your home and whether you are seriously delinquent on your mortgage payments at the time you file bankruptcy. If you are concerned about what will happen to your home, you should consult an experienced bankruptcy attorney for guidance based on your circumstances. However, in most bankruptcy cases, individuals are able to keep their homes. In general, those who file for Chapter 13 bankruptcy have a greater ability to protect their assets than those who file under Chapter 7.

Do I need a lawyer to represent me if I file a bankruptcy case?

You can represent yourself in a bankruptcy proceeding if you choose, but you do so at your own risk. It is crucial that bankruptcy cases be filed and handled correctly, and you must comply with all of the rules, which are highly technical. Bankruptcy courts in Illinois generally require that all bankruptcy materials be filed electronically and not through written papers, but if you are representing yourself, the courts will typically allow you to file your documents in paper form with the clerk's office. In every bankruptcy case, each individual is required to prepare and submit to the court detailed forms concerning his or her property, debts, and financial affairs, which are difficult to complete without the help of an attorney. Additionally, options available to each individual, such as property claiming exemptions, filing jointly with a spouse, and what type of bankruptcy to file, probably cannot be properly assessed without the assistance of an experienced attorney.

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Prepared by the Illinois State Bar Association's Commercial Banking, Collections, and Bankruptcy Section (2016)

Buying on time

Buying on credit has become so commonplace today that we often take it for granted without fully understanding the legal consequences. However, you should never accept the invitation to "buy now and pay later" without being fully informed of what is involved. For one thing, you will pay more money since interest and other costs are added to the cash price of the merchandise. Moreover, in most cases you will likely be asked to enter into a sales contract that contains a security agreement, which seeks to protect the seller by allowing the goods sold under the contract to serve as collateral for the extension of credit. Among other things, the security agreement within the contract will set forth when and how the seller or finance company can repossess the merchandise should you fail to make the required payments.

There are four simple steps you should follow to protect your interests before you buy on credit. First, shop and compare. The interest rates and terms of payment can vary depending on where you make your purchase. Second, always deal with an established and reputable company that will stand behind its merchandise. Third, read and understand all documents before you sign them. Fourth, if you have questions, call your family lawyer. In many cases, your questions can be answered without an office consultation.

Credit cards

The most common method for buying on credit is the credit card. Generally, when you use a credit card, you are taking advantage of an arrangement called "revolving credit," in which the issuer of the credit card effectively loans you the money for the purchase and charges you a stated interest rate for doing so. The applicable interest rate and the usual service charges are regulated by law. These regulations will vary depending upon the type of credit arrangement that they address; for example, the regulatory provisions for a loan that is to be repaid in a lump sum at the end of the billing period will be different from the regulatory provisions for an installment loan that is to be repaid in periodic installments over a specified amount of time.

In any case, the issuer of your credit card must inform you in writing of the various requirements of the credit arrangement.

If a person possesses your credit card without your permission and intends to use it or sell it, he or she has committed a criminal offense and could be charged with a class 4 felony potentially punishable by one to three years in prison. Moreover, if you lose your credit card or it is stolen, you are not responsible for any unauthorized purchases that occur after you notify the issuer that your card has been lost or stolen. And even further, your responsibility for unauthorized purchases made before you are able to give notice to the issuer of the loss, theft, or unauthorized use of your card is limited to a specified applicable amount (e.g., $25 for the unauthorized use of a card without a signature panel prior to notification).

If you receive a credit card that you have not requested, you are not liable for any purchases or amounts owed in connection with that credit card unless you have indicated your acceptance of the card by signing or using it or by permitting or authorizing another person to use it. The mere failure to destroy or return an unsolicited credit card is not an indication of the card's acceptance and thus you are not responsible for unauthorized purchases made with that card under these circumstances.

The promissory note and security agreement

A security agreement in the context of a credit sale transaction occurs when the seller retains a security interest in some or all of the goods you have purchased in order to secure repayment for those goods should you fail to pay the amount required by the sales contract. In an effort to provide you with some protection when entering into a security agreement, Illinois law requires a seller's security interest to remain unenforceable against you unless three conditions are met: value has been given to the collateral, you have rights in the collateral (i.e. it is in your possession), and you have signed a security agreement that provides a description of the collateral.

The seller may wish to receive payment for the merchandise immediately rather than waiting for you to make the installment payments. To obtain payment immediately, the seller can sell the security agreement to a bank or finance company and receive immediate payment from them. In such a case, you will then be advised in writing to make your payments to that bank or finance company rather than to the seller.

A promissory note is attached to or made a part of the security agreement. You will be required to sign both documents. The promissory note is a statement whereby you promise to make the required payments to the holder of the note. You, as the buyer, are responsible to make the payments, and the seller of the merchandise may sell the promissory note or security agreement to another lender.

Rights of seller upon default

If you sign a security agreement and fail to make the payments as set forth in the sales contract, the seller may sue you to judicially enforce his or her security interest. A formal court proceeding is not the only way sellers can enforce their security interest; there are a variety of nonjudicial methods of enforcement that sellers may use to avoid litigation in court. In most cases, the seller will simply attempt to repossess the goods sold, which can be accomplished without the need for a court proceeding so long as the seller's repossession attempts do not breach the peace. A seller is not required by law to notify you of his or her intent to repossess your goods, although some may choose to do so. However, if the parties agree in the initial security agreement that the seller will provide notification of the intent to repossess before repossession occurs, the seller must notify you in order to comply with the terms of the agreement.

Once the goods are repossessed, the seller may sell, lease, license, or otherwise dispose of any or all of the goods and credit the money received from the disposition to the amount you owe on the contract and to the reasonable expenses incurred as a result of the repossession and disposition of the goods. However, before the seller can dispose of your repossessed goods by any method, he or she must send you a notification of disposition describing the goods being subjected to disposition, the method of disposition the seller intends to use, the time and place of disposition if it is public, and the best way for you to learn the exact amount that must be paid any time before the disposition in order to get your goods back. If you receive notice and are able to pay the amount you owe in full before the disposition of your goods, they will be returned to you. If the amount of the cash proceeds from the disposition of the goods exceeds the amount you still you owe, the seller must give you the extra money back. However, if the disposition results in less than the balance you owe, you may have to pay the difference.

Defective goods

Ordinarily, if you find that merchandise you have purchased is defective, you may require the seller to replace the item or fix the defect. If you have received defective goods, you may withhold payment for those goods, but you must also notify the holder of the note that the goods are defective. Defects in merchandise you have purchased do not in and of themselves release you from your promise to make payments under the sales contract, but do give you a defense if the seller or the person to whom the security agreement has been assigned or sold tries to sue you for non-payment. If the seller assigns or sells the security agreement to a new lender, the seller still remains responsible for the necessary repairs or the replacement of the defective item under the general sales contract. If you discover a defect in a purchased item, you should protect yourself by immediately notifying the seller and the new lender, if there is one. It is always best to give this kind of notice in writing and to keep a copy for your records.

In Illinois, the laws governing the purchase of automobiles differ somewhat from those governing the purchase of other merchandise. Automobile dealers are usually responsible for defects and repairs as are described in the automobile warranty issued when the automobile is sold new.

"As is" merchandise

A seller who wishes to avoid warranties that would obligate him or her to make repairs to the merchandise sold if necessary may offer goods for sale "AS IS." Ordinarily, it is commonly understood that agreeing to accept an item "AS IS" implies that you are willing to assume the risk that you might receive defective merchandise and to forfeit any claim against the seller for such a defect. Thus, if the contract for the sale of any given good is stamped "AS IS" and you accept its terms, all warranties for the good are excluded from the purchase. However, you can refuse to buy any item that is designated "AS IS," and in most cases you should choose to do so, especially when it comes to expensive or large purchases, in order to protect your legal rights as best you can.

Limits on interest

There is a limit to the interest that a seller in Illinois may add to the price of goods purchased on the installment plan. Any charge in excess of the limit is illegal and is a basis for the cancellation of the contract if you desire to do so. The interest must be disclosed on the face of the contract. Do not sign any sales contract until you are certain that you can afford the interest and that the interest is in compliance with the law. If you have any doubts, do not sign the contract until you have consulted your lawyer. It is wise to treat a purchase on credit with the same caution and care you would exercise in obtaining a loan from a bank or other financial institution. Your lawyer can provide the advice you may need to avoid entering an unfavorable contract.

Remember, whenever you contemplate signing a binding contract, be sure you understand the terms of the agreement. An ounce of prevention is always worth a pound of cure.

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Prepared by the Illinois State Bar Association's Commercial Banking, Collections, and Bankruptcy (2017)