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Chicago creditors rights attorneyIn general, bankruptcy is an outcome that most creditors want to avoid when dealing with a debtor. If you are an unsecured creditor, the debtor may use bankruptcy discharge to clear their debt while paying you little or none of what they owe. Most consumer debtors file for either Chapter 7 or Chapter 13 bankruptcy, and the chapter they choose may depend on what they qualify for.

A debtor cannot use Chapter 7 bankruptcy if the bankruptcy court deems that they are capable of repaying their debts. One way that a potential bankruptcy filer can determine whether they qualify for Chapter 7 bankruptcy is through the Chapter 7 Bankruptcy Means Test. If the debtor does not pass the test, then Chapter 13 bankruptcy may be their only option.

Chapter 7 vs. Chapter 13

Before explaining the Chapter 7 Means Test, it is helpful to understand the difference between the forms of bankruptcy from a creditor’s perspective:

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Four Arguments for Denying Chapter 7 Bankruptcy DischargeThe primary reason that creditors do not want debtors to file for bankruptcy is the possibility of discharging the debt. At the end of a Chapter 7 bankruptcy case, the court will discharge most of the remaining debts that were not paid from the sale of nonexempt assets. Secured creditors can repossess the collateral property but cannot collect on the loan balance without a reaffirmation agreement. Debts to unsecured creditors may be completely wiped out. Creditors can attempt to deny the discharge of their debts by using an adversary proceeding against the bankruptcy filer. They must prove that the debtor is attempting to defraud them through bankruptcy. There are several reasons why a court may agree to deny the discharge of debts:

  1. Lying During Bankruptcy: A debtor may abuse the bankruptcy process in order to discharge debts that they are capable of paying. A court may deny the discharge of all debts if the debtor lied or withheld information with the intent to defraud the creditors and manipulate the system.
  2. Lying on the Loan Application: A debtor may have entered a loan agreement under false pretenses, such as misrepresenting their income in order to qualify for the loan. The debt is ineligible for discharge because the debtor was attempting to defraud the creditor by incurring debts that they knew they could not repay.
  3. Racking Up Last-Minute Debts: A debtor who intends to file for bankruptcy may think they are being sneaky by making several purchases with their credit card immediately before they file. The court will assume that these debts are nondischargeable if the debtor used a single creditor to purchase at least $725 worth of luxury items within 90 days of filing for bankruptcy. A similar rule exists for cash advances on a credit card. In both instances, the debtor is adding to their debt under the assumption that it will be discharged.
  4. Transferring Nondischargeable Debts: There are certain debts that cannot be discharged through bankruptcy, such as child support, spousal maintenance, unpaid taxes, and student loans. The debtor may think they can work around this by using a credit card to pay a large portion of these debts and then discharging the credit card debt during bankruptcy. Courts do not allow bankruptcy filers to clear their nondischargeable debts by transferring them to a form of debt that is dischargeable.

Contact a Chicago Creditor’s Rights Lawyer

You have only 60 days after the meeting of creditors to object to a discharge of your debt through bankruptcy. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can explain your options for responding to a bankruptcy filing. To schedule a consultation, call 312-704-0771.

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Four Ways to Present Reaffirmation Agreements During BankruptcyOffering a reaffirmation agreement to a debtor going through Chapter 7 bankruptcy can allow a secured creditor to receive close to full value on debts for real and personal property. As part of a Chapter 7 debt discharge, a secured creditor normally repossesses properties if a debtor will be unable to repay the loan. However, the creditor most likely cannot hold the debtor liable for any deficiency after resale of the property. With a reaffirmation agreement, the debtor keeps the property as long as he or she can continue making payments. If the debtor defaults, the creditor can repossess the property, and the debtor would be liable for any deficiency after resale. Knowing the risk this may pose their clients, bankruptcy lawyers will discourage debtors from signing reaffirmation agreements. Creditors need to inform debtors of why a reaffirmation agreement may be to their advantage:

  1. Property Importance: Some collateral property during a bankruptcy has greater value to a debtor than others. A debtor may be more eager to hold onto real estate and personal vehicles than luxury items. Thus, debtors will be more receptive to proposals that allow them to retain possession of important properties.
  2. Realistic Plan: A court will reject a reaffirmation agreement that puts an undue burden on the debtor. Debtors must also be current on their debt payments in order to enter an agreement. Creditors should understand whether debtors will have the financial means to make payments after bankruptcy. If a debtor does, the creditor can explain why it is reasonable to reaffirm the debt.
  3. Short-Term Debt: In some situations, the remaining debt on an agreement may be small enough that the debtor could repay it in a year or less. Offering short-term repayment plans that allow them to keep their properties may be more palatable to debtors.
  4. Modifying Loan: The debtor may need an extra incentive in order to reaffirm a debt. The creditor can present an agreement that lowers the burden on the debtor by reducing the monthly payments or interest rates. A better deal may entice a debtor to reaffirm.

Reaching an Agreement

Debtors must state their intention to reaffirm debts before their debts are discharged during Chapter 7 bankruptcy. Though either party can file a reaffirmation agreement, creditors are most often the ones to initiate the discussions. Reaffirmation agreements must be filed within 60 days after the first meeting of creditors. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can help you negotiate a reaffirmation agreement with your debtor. Schedule a consultation by calling 312-704-0771. 

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How Bankruptcy Affects Debt CollectionBankruptcy is one of a debtor’s most powerful tools to avoid paying off debt owed to a creditor. If granted bankruptcy, debtors may be able to absolve themselves from responsibility for some of their debts. When a debtor files for bankruptcy, the court can place an automatic stay on the creditor’s debt collection efforts until it decides on the bankruptcy case. Creditors can object to the automatic stay or the bankruptcy claim. Creditors have two types of bankruptcy they most often deal with, each having a different effect on their ability to collect debts.

Chapter 7

Chapter 7 bankruptcy is considered favorable for debtors who do not own many high-value assets. In order to qualify for this form of bankruptcy, the debtor:

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