A lot of our clients have told us that "someone they know" has told them they can't file a bankruptcy if they own a house or car. Also, they have been told that they will lose their house and car if they file for bankruptcy. So, let's set the record straight. In most cases, people are able to keep their home when they file for bankruptcy. In a Chapter 7 Bankruptcy, you must be current on your mortgage payments (real estate taxes and insurance, too) and continue to make your regular mortgage payments as you would normally. You are also allowed to have some equity in your home. In Illinois, each person filing bankruptcy may protect or "exempt" up to $15,000.00 of equity they have in their home (you must be on title to the house in order claim this exemption).
In a Chapter 13 Bankruptcy, a person may be able to keep their home even if they are behind on their mortgage payments.
Chapter 13 is available to help those individuals who have a steady income but still are unable to meet their current financial obligations. This form of bankruptcy allows someone to restructure their debt and have it discharged within a set amount of time. The amount that a person is behind on their mortgage, otherwise known as the "arrearage," can be repaid through the Chapter 13 plan. This allows someone to catch up on their mortgage payments without the fear of foreclosure. In addition to making the Chapter 13 plan payments, the homeowners must also continue making their regular monthly mortgage payments after the Chapter 13 Bankruptcy is filed.
As with a house, in most cases, it is generally not a problem to keep a car in a Chapter 7 Bankruptcy. The person must be current with their payments, maintain full coverage insurance on the vehicle, and agree to keep making the monthly payments as they would normally. If the vehicle has any equity, Illinois law provides for a $2,400.00 motor vehicle exemption for each owner of the car. If the vehicle has more equity than can be protected by the motor vehicle exemption, each person filing bankruptcy in Illinois is also given a $4,000.00 "wildcard exemption" which may also be applied towards a motor vehicle.
However, Chapter 13 treats vehicles a little differently. The vehicle must also be fully insured, but the balance that is owed on the vehicle loan is included in the Chapter 13 Bankruptcy Plan. So it is certainly possible to keep a car in a Chapter 13 Bankruptcy even if someone is behind on the monthly payments. Once a bankruptcy is filed, creditors are prohibited from pursing or continuing with any collection activity including repossessions as a result of the bankruptcy "Automatic Stay" that goes into place as soon as a bankruptcy is filed. The Chapter 13 plan will provide that the vehicle lender will be repaid over a period of time. It must be mentioned that the person filing bankruptcy must truly need the vehicle. The Court will not approve someone's Chapter 13 plan unless the vehicle is necessary to complete the Chapter 13 (i.e. getting to and from work).
Charles Glanzer is a Chicago Bankruptcy Attorney who concentrates his practice on representing people in Chapter 7 and Chapter 13 Bankruptcies.