Chicago Bankruptcy Law Blog

Chicago Bankruptcy Question of the Day: Will I lose my income tax refunds if I file for Chapter 13?  In the Chicago area, the answer to this question depends on the structure of your Chapter 13 plan of reorganization and which Chapter 13 trustee you are assigned to.  

One of the requirements of confirming (approving) a Chapter 13 plan of reorganization is the court's determination that the filer(s) is contributing all projected disposable income to the plan for the entire term of the plan.  In the Chicago area, the courts have consistently held that income tax refunds are to be included in the calculation of projected disposable income.  Therefore, as a general rule, income tax refunds have to be paid to the Chapter 13 trustee as additional payments, which will then be disbursed to your creditors in the order and manner provided for in the plan.  There are, of course, exceptions to this rule.

First and foremost, if your Chapter 13 plan of reorganization already calls for full repayment of all of your creditors, then the trustee will not request that income tax refunds be paid into the plan.  Some filers do elect to do so voluntarily, as doing so will will reduce the amount of time that you are in the plan by paying it off earlier than projected. Second, two of the three Chapter 13 trustees in the Northern District of Illinois, Eastern Division, which covers Cook and the collar counties, allow filers to keep the first $1,200 of their income tax refunds.  These are the offices of Tom Vaughn and Glenn Stearns.  Any refund above $1,200 is required to be paid to the Trustee as an additional payment.  Only the office of Marilyn O. Marshall requires contribution of the entire tax refund.  Third, if there are immediate and necessary expenses that can only be paid with your income tax refund, your bankruptcy attorney may be able to file a motion to get an exception to this requirement for a given year.  In order to be successful in this, you will need to provide specific documentation supporting the expenses to the attorney and the expenses must be reasonable and necessary in the eyes of the court.

It is normally recommended that, upon filing for Chapter 13 in Chicago, you contact your payroll department and adjust your deductions so that you do not receive a significant income tax refund.  Instead, you have smaller tax deductions taken and more take home income from each paycheck.  This will make your budgeting easier, limit your Chapter 13 plan to only the fixed monthly payments proposed and keep you from giving the federal government an interest free loan until they return the funds in the following year. 

If you are considering filing for Chapter 13 bankruptcy protection and normally receive a significant income tax refund, you want the advice of an experienced Chicago bankruptcy attorney before you file your case and throughout your Chapter 13.  A skilled bankruptcy attorney will properly advise you on how to minimize the loss of your income tax refunds while still acting in good faith in filing your Chapter 13.  The experienced bankruptcy attorneys at Ledford & Wu are happy to offer a free consultation to discuss your options and assist you in properly planning for a Chapter 13 bankruptcy filing.

Some of the primary reasons that people file for Chapter 13 bankruptcy in the Chicago are involve their vehicles.  Whether it be to protect a financed vehicle from repossession, recovering a vehicle that has already been repossessed, reducing existing vehicle payments or protecting a paid in full vehicle that has more equity than what the Illinois exemptions can protect, vehicles drive a a lot of Chapter 13 filings (I don't apologize for the pun).

When you file for Chapter 13 bankrutpcy protection, you are required to disclose all vehicles in which you have a legal interest at their current fair market values.  If there is any debt attached to the vehicle, this too must be disclosed, notice must be given to the creditor(s) and the debt must be treated in your Chapter 13 plan of reorganization.  This does not mean that you will lose the vehicle(s), as the purpose of Chapter 13 is to protect those assets that are reasonable and necessary for your reorganization.  Upon filing for Chapter 13, the bankruptcy court issues the automatic stay of bankruptcy, which is basically an injunction against your creditors prohibiting any further collection action.  This is what protects a vehicle from repossession and what requires the lender, in most circumstances, to return a vehicle that has already been repossessed.

If the vehicle(s) in question are paid in full, it is a very simple analysis.  You schedule the value of the vehicle and exempt as much as of the equity as legally possible.  In Illinois, you are entitled to one $2,400 motor vehicle exemption and one $4,000 personal property exemption per filer.  If there is value above the amount of the exemptions, then you are required to pay at least that amount to your unsecured creditors through your Chapter 13 plan of reorganization.  Failure to do so will mean that the proposed plan is unconfirmable on its face.

If the vehicle(s) is financed, things get a little more tricky in Chapter 13.  You always have the right to surrender the vehicle back to the lender.  They will take the vehicle, sell it and apply the sale proceeds to the loan balance.  Any remaining debt will be treated as an unsecured debt within your plan.  If you want to keep the vehicle and are the only one on the loan, then the treatment will depend on how long ago you financed the vehicle.  If you financed the vehicle less than 910 days prior to the Chapter 13 filing, then the full balance on the loan must be paid within the Chapter 13 plan.  If you financed the vehicle more than 910 days prior to the Chapter 13 filing, then you can "cram down" the vehicle.  This basically means that instead of paying the full balance of the loan, you only pay the value of the vehicle.  The difference is again treated as an unsecured debt in your plan.  In either case, the effective interest rate on the loan can usually be significantly reduced, as can the payment.

If you have a cosigner on the loan, then in order to protect the cosigner and eventually get title to the vehicle, you will be required to pay not only the full balance on the loan, but also the full contract rate of interest within the Chapter 13 plan.  If a cosigner is making the direct payments on the vehicle, then it can simply be left outside of the Chapter 13 plan, but this must be disclosed and addressed in the plan.

You do have the right to maintain direct payments on the vehicle outside of the Chapter 13 plan.  You must realize, however, that if you elect to do so and the payments end during the life of the Chapter 13 plan, the trustee will see the amount of the car payment as additional disposable income and expect your plan payment to increase once the vehicle payment ends.

Now, just to make it a bit more complicated, any financed vehicle that you are proposing to keep while under the protection of the Chapter 13 bankruptcy must be deemed by the court to be "reasonable and necessary for your effective reorganization".  If it is not, then the court will not confirm (approve) your Chapter 13 plan of reorganization unless it calls for the full repayment of all of your debts.  This is a common issue when someone attempts to keep a luxury car, multiple financed vehicles, a financed boat or their financed Harley Davidson and proposes to pay their unsecured creditors only pennies on the dollar.  The court will not consider this as acting in good faith and will not confirm a plan with these provisions. 

If you are considering filing for Chapter 13 bankruptcy protection in the Chicago area, odds are that you have at least one vehicle.  To ensure that your vehicle(s) is properly protected and treated within your Chapter 13 plan, you need the representation of an experienced Chicago bankruptcy attorney.  The bankruptcy lawyers at Ledford & Wu all have years of experience representing those in Chapter 13 bankruptcy and are happy to offer a free consultation to review your options.

Chicago experienced a wave of unseasonably warm weather in the late winter and early spring, and many residents may have used the opportunity to take to the tennis courts early. Just as the weather is gradually improving here, the prospects for tennis equipment company Prince Sports, Inc. are getter better after it filed for Chapter 11 bankruptcy this week.

The company's bankruptcy petition reveals that it has a high debt load. It owes over $10 million to its suppliers and $65 million to a company named ABG-Prince LLC. Those debts stand against assets valued between $50 and $100 million. The debt to ABG-Prince is secured debt, a classification that is very important in a bankruptcy proceeding. Secured creditors typically receive more in a bankruptcy.

Chicago Bankruptcy Question of the Day: Will filing a Chapter 13 stop a wage garnishment?  In almost all cases, the answer to this question is yes.  Immediately upon filing for Chapter 13 bankruptcy protection in the Chicago area, two very important things happen. 

First, the automatic stay of bankruptcy is issued by the federal bankruptcy court pursuant to section 362 of the U.S. Bankruptcy Code.  The automatic stay of bankruptcy is basically an injunction against your creditors requiring them to stop any and all collection actions against you.  This includes stopping most wage garnishment orders, as these orders are issued by the state courts usually and the federal injunction supersedes the state court order. 

Second, all of your property becomes part of your bankruptcy estate pursuant to section 541 of the U.S. Bankruptcy Code.  This includes your ongoing wages, which are now protected.  One of the key elements of a Chapter 13 bankruptcy is that you are proposing to use your future income to repay some or all of your debts back in good faith while under the protection of the bankruptcy courts.  This would not be much help if creditors were still allowed to garnish your wages, so the bankruptcy code prohibits such actions. 

In order to effectively stop a wage garnishment immediately upon filing, notice is the most important factor.  When done properly by an experienced Chapter 13 bankruptcy lawyer, notice of your bankruptcy filing will be faxed to your payroll department, so that they know to stop the garnishment, the creditor, so that they know why the garnishment stopped, and the attorney for the creditor, so that they do not attempt to pursue further action. 

There are three common scenarios where a wage garnishment is not effectively stopped upon the filing of the Chapter 13 bankruptcy.  The most common is a garnishment for current domestic support obligations; child support, alimony, maintenance, spousal support, etc.  These deductions are specifically excepted from the bankruptcy code.  A garnishment for past due domestic support obligations can be stopped so long as the debt is properly treated in the Chapter 13 plan of reorganization.  Also common is where the automatic stay does not go into effect upon filing.  This occurs when the filer has had two or more Chapter 13 cases dismissed within the past one year.  In those cases, a motion must be made by the bankruptcy attorney to impose the automatic stay.  Unless and until the automatic stay is imposed, the garnishment will continue.  The third, less common situation is where a cut-rate attorney does not give proper notice.  If notice is not given appropriately, the garnishment can remain in effect until such notice is given, as creditors are not expected to constantly check for bankruptcy filings when there is an ongoing garnishment.  The garnishment will stop once proper notice is given in these situations.

If you have a pending or ongoing wage garnishment and are considering filing for Chapter 13 bankruptcy protection in the Chicago area, it is essential that have an experienced bankruptcy attorney representing you.  A good bankruptcy lawyer will work with haste to get your case filed, but will also do so properly.  They will ensure that notice is issued immediately upon filing and warn you of any risks of the garnishment not stopping and what to do if it does not stop.  The bankruptcy attorneys at Ledford & Wu have filed thousands of Chapter 13 cases and are always happy to meet with you for a free consultation to discuss your bankruptcy options to stop a wage garnishment.