(What you're about to read is not legal advice. Please talk to a licenced attorney in your state for legal advice about your situation.
Most people think that bankruptcy is like the "get out of jail free" card in Monopoly for a person who owes money. Most people know that bankruptcy hurts your credit for 7 to 10 years, but not many people know that even if you file a "straight" Chapter 7 bankruptcy, you might still have to pay back the debt. Formally, bankruptcy is "a proceeding in federal court in which an insolvent debtor's assets are liquidated and the debtor is released from further liability." On the other hand, most people would probably say that bankruptcy is "the process of getting rid of all your debts for free." Most of the time, the second definition is more accurate. However, even if you file for bankruptcy, you may still have to pay back at least some of your debts in some situations.
So, when are you likely to have to pay back what you owe? Here are the most common situations where filing bankruptcy will hurt you badly for 7 to 10 years but not help you at all (you'll still have to pay back at least some of your debts):
- You have a higher income than most people in your state. If this is the case, you'll probably have to file for Chapter 13 bankruptcy. In Chapter 13 bankruptcy, the court tells you to give all of your extra money to a trustee who is chosen by the court. The trustee then gives payments to your creditors. Keep in mind that the court figures out how much money you have left over based on national and county statistics about average necessary expenses, not on how much you're paying. So just because you're paying a lot for a car doesn't mean the court will let you buy it. In many cases, a judge has told parents to stop sending their kids to private schools so they can get more money to pay back their debts. Here are the latest numbers on the Illinois median household income by size:
1 - person families
41,650
2 - person families
52,891
3 - person families
62,176
4 - person families
72,368
- You own things. If you own a house or car, the bankruptcy court could force you to sell them to get enough money to pay back your creditors. Chances are, if you have a lot of money invested (and it's not in a tax-free account like an IRA), you'll also have to sell it. If you have a second home or a second car (and you own both of them in full), you're really out of luck. Consumers don't have to go through bankruptcy hell because there are some protections in place. In Illinois, every resident is entitled to at least $7,500 of the value of their home, $1,200 of the value of their car, and $2,000 for anything they want (known as the wild card exemption). Also, if you're married, these amounts double (assuming the property is in both of your names).
What does this mean in real life? Take the following example into account.
Let's say that you and your wife own a house together that is worth $250,000. You still owe about $200,000 on your mortgage, so you decided to file Chapter 7 bankruptcy. In this case, you would be forced to sell your home. With the money from the sale, you would pay back the mortgage company what you still owe on the loan ($200,000), pay yourself the Illinois real estate exemption ($15,000), and then pay back your other creditors whatever was left ($250,000–$200,000–$15,000=$35,000).
Let's say that your house was only worth $215,000, but everything else stayed the same. In this case, you wouldn't have to sell your home because the money from the sale wouldn't be worth anything after you paid back the mortgage company and gave yourself the Illinois real estate exemption.
- Your creditors can show that you were dishonest and that you never planned to pay them back.
For those of us in the above three groups, this usually means that bankruptcy may not be the best choice unless: a) you don't have much equity in any of your property, b) you don't have any investments like stocks, real estate, etc., c) you don't mind having to sell anything in points a and b, or d) you don't mind giving up your disposable income for 5 years in a Chapter 13.
