CHAPTER 7 BANKRUPTCY

Our in-house paralegal is considered a Bankruptcy Petition Preparer (BPP) which is any person or business, other than a lawyer or someone who works for a lawyer, that charges a fee to prepare bankruptcy documents. 

Under our clients strict guidance and direction, the BPP will generate the appropriate  bankruptcy forms. We do this by transposing your information onto the relevant bankruptcy forms.  

Our clients are expected to do their homework by reviewing, signing, and then filing their own bankruptcy case. 

Bankruptcy petition preparers are not attorneys, they cannot provide legal advice or represent you in bankruptcy court. 

This means that the bankruptcy petition preparer cannot:

• tell you which type of bankruptcy to file
• tell you not to list certain debts
• tell you not to list certain assets, or
• tell you what property to exempt.

YOU must understand what debts your bankruptcy will discharge, what will happen to your property in the bankruptcy, and what laws should be used to exempt your property from being taken for the benefit of your creditors.

In addition, you must file the bankruptcy papers yourself and represent yourself in court. In other words, you are responsible for your case. 

When you hire APS, you are considered a pro se filer which means you will act as your own attorney.  

When you hire APS as your personal Bankruptcy Petition Preparer, we transpose the information you provide onto the official forms of the bankruptcy chapter you wish to file.

The bankruptcy petition preparer can not tell you anything about the law or the bankruptcy process, so why use one?

• If you don't have ready access to a computer or quality laser printer, you may want to pay someone to prepare the forms. 

• A good bankruptcy petition preparer will use up-to-date bankruptcy forms and will generate the documents quickly.

• Most bankruptcy petition preparers charge low fees ($100 - $200) especially compared to lawyers. APS chages only $150.

• Before you hire a bankruptcy petition preparer, learn about bankruptcy law and the options for completing your bankruptcy paperwork on this website, under the Bankruptcy section or click on the button below.

Anyone can be a bankruptcy petition preparer. There are no educational, age, or experience requirements. Nor are bankruptcy petition preparers required to take a test or pass a background check. However, Carrie, our in-house BPP is educated, trained and undergoes an annual background screening

APS adhere to a servant leadership attitude, which means we always put clients first above our own needs. 

APS provides clients with respect and confidentiality as well as the appropriate bankruptcy services they need during their most difficult financial challenges.

Bankruptcy law does require bankruptcy petition preparers to follow certain business practices

Among other things, bankruptcy petition preparers must:

• provide a written contract defining their services and fees.

• provide written disclosures summarizing the different kinds of bankruptcy and the associated procedures.

• identify themselves (in their marketing materials) as debt relief agencies providing services under the federal bankruptcy code.

• not charge an unreasonable fee (fees generally range from $100 to $200).

• not collect or handle the bankruptcy filing fees or other court fees (you must pay fees to court yourself).

• file a fee disclosure statement with the court (stating how much they have charged you for services).

• include their name and social security or tax identification number on the documents they prepare.

• not use, or advertise with, the word "legal" or any similar term.

These restrictions apply only to bankruptcy petition preparers, who, by definition, charge a fee. People who help others for free are not subject to these rules.

• 1 Earner:   $67,102
• 2 people in household: $84,892
• 3 people in household: $101,951
• 4+ more people in household:  $122,289

We will review the Means Test together at our first meeting to determine whther or not you can file this type of bankruptcy chapter.

Allowable Living Expenses

The first form, Chapter 7 Statement of Your Current Monthly Income (Form 122A-1), helps you calculate your current monthly income (CMI) and yearly income for bankruptcy purposes. You'll start by listing all gross income received during the six full months before your bankruptcy filing date.\

You'll pass the test as long as your income doesn't exceed the state median income. To get the correct comparison figure, you'll divide your gross figure by six and multiply it by twelve before comparing it to the state's annual median income figure.

If you pass this portion of the test, it won't be necessary to fill out additional forms.

If your income is higher than your state's median income, you'll get a second chance to pass the means test by completing the second form, Chapter 7 Means Test Calculation (Form 122A-2).

You'll deduct allowed expenses from your income, such as housing costs, utilities, child care, taxes, insurance, and tithing. The calculations will determine whether you have any disposable income to pay debts. 

If you don't have much left over, you'll pass the test and will qualify to receive a Chapter 7 discharge. Otherwise, you'll likely have to consider filing for Chapter 13 bankruptcy

If you're wondering how to calculate your current monthly income or "CMI," as referenced in the section "The First Bankruptcy Means Test Form" above, this is how you'll do it.

For the means test purposes, your CMI is the average monthly income you receive from all sources during the full six-month period before your filing date.

For instance, if you planned to file your bankruptcy paperwork on November 20, 2020, you'd include all income received starting May 1, 2020, and continuing through October 31, 2020.

To get your CMI, add up the total income you received from all sources during the six-month look-back period, and then divide by six to come up with your average monthly income. If the income is from wages, use the gross amount. Before comparing your income to your state's yearly median income, you'll change the CMI to a yearly amount by multiplying it by twelve.

You'll find your state's yearly median income figures on the U.S. Trustee Program website. If your yearly amount doesn't exceed your state's median income, you'll pass. You won't need to complete additional forms.

If you don't pass the first portion of the means test, you'll be able to deduct your income tax and other expenses when completing the second form.

 You must include all of your income, whether it is taxed or not, except the following:

• payments you received under the Social Security Act (including Social Security Retirement, SSI, SSDI, and TANF)
• payments to victims of war crimes or crimes against humanity, and
• payments to victims of international or domestic terrorism.

Here are some examples of income you should include (this list is not exhaustive):

• wages, salary, tips, bonuses, overtime, and commissions
• net income from the operation of a business, profession, or farm (the amount you report as taxable income, after subtracting reasonable and necessary business expenses on IRS Schedule C)
• interest, dividends, and royalties
• net income from rents and other real property income
• pension and retirement income
• regular contributions to the household expenses of the debtor or the debtor's dependents, including child or spousal support
• regular contributions by the debtor's spouse (unless you are legally separated)
• unemployment compensation
• workers' compensation insurance
• state disability insurance, and
• annuity payments. 

If you are employed and get a regular paycheck in the same amount each pay period, it will probably be easy to calculate your CMI. A court might be willing to calculate your CMI differently if your income is irregular. A good bankruptcy attorney can explain local practices and advocate for an interpretation of CMI advantageous to you

• All individual bankrutpcy filers are required to complete pre-bankruptcy credit counseling.

• Credit counseling must take place before you file for bankruptcy; 

• Certificate of completion for credit counseling is required but before the filer’s debts can be discharged. 

• Only credit counseling organizations that have been approved by the U.S. Trustee Program may issue these certificates.

• You may be required to pay a fee.

• All individual bankrutpcy filers are required to complete pre-discharge debtor education.

• Debtor education must take place after you file.

• Certificate of completion for debtor education is required but before the filer’s debts can be discharged.

• Only debtor education course providers that have been approved by the U.S. Trustee Program may issue these certificates.

• You may be required to pay a fee.

• When filing for Chapter 7 or the "liquidation" bankruptcy, most people keep all of their property. 

• You only lose property in Chapter 7 bankruptcy that you can't protect with a bankruptcy exemption.

• If you're not familiar with bankruptcy exemptions yet, they're laws that let you keep essential property from creditors. Scroll down below for further information about IL exemptions.

• For instance, creditors can't take your clothing, dishes, couch, or any other household item worth less than approximately $700 in most instances, although the specifics vary by state.

• Exemption laws protect those items, and more, from creditors both in and out of Chapter 7 bankruptcy.

• But bankruptcy exemptions usually don't protect luxury items or assets with a lot of equity, so you could lose a boat, an expensive car, or even your home in Chapter 7. 

When you file a Chapter 7 bankruptcy, the bankruptcy court appoints a bankruptcy trustee to sell your "nonexempt" assets which are those things not protected by a bankruptcy exemption, to pay your creditors.

• However, filing for bankruptcy doesn't mean that you have to give up all of your property. Bankruptcy exemptions let you keep enough to give you a fresh start after the bankruptcy.

• In bankruptcy, the Chapter 7 trustee can't sell an asset you can protect with an exemption.

• Keeping property in Chapter 7 bankruptcy will depend on the assets' value and the exemptions you can claim. Because of exemptions, most Chapter 7 filers keep all or most of their property.

• Or, you could have secured debt, such as a car payment or mortgage. In that case, the creditor's lien on the property ensures that the creditor gets paid first.

When you complete your bankruptcy paperwork, you'll list all of your property and any exemption that you can claim for each item. 

• If the exemption covers the property entirely, you'll be able to keep it. If an exemption doesn't cover an item, the trustee will sell it and use the money to pay your creditors.

• But sometimes, the situation can be more complicated. The exemption might partially cover the equity in the property. 

• Or, you could have secured debt, such as a car payment or mortgage. In that case, the creditor's lien on the property ensures that the creditor gets paid first.

Here's how it works.

Suppose your car is worth $10,000, and your state allows you to exempt $5,000 in vehicle equity. Your outstanding car loan is $5,000. The trustee must pay the lender $5,000, leaving equity of $5,000. 

Because the bankruptcy exemption would protect all vehicle equity, the bankruptcy trustee would not sell the car.

If, however, your state only allows a $2,000 car exemption, then the trustee could sell your car and do the following with the proceeds:

• pay the lender $5,000
• pay you the $2,000 exemption amount
• pay sales fees and costs out of the remaining $3,000, and
• distribute any remainder to other creditors.

If the exemption scheme you're using has a wildcard exemption—an exemption you can apply to any property—you can use it in addition to the motor vehicle exemption that's specifically for protecting vehicle equity.

• In a Chapter 7 case, the consumer can keep all property which is "exempt" from the claims of creditors and is not secured by a mortgage or other lien. 

• No matter where you live, your household goods and clothing are usually exempt unless they're unusually valuable

• Illinois has opted out of the federal bankruptcy exemptions, which means that residents of Illinois are only able to exempt property that is exempt under Illinois law or non-bankruptcy federal law. 735 ILCS 5/12-1201.  

Real property: 735 ILCS 5/12–901 is the Illinois Homestead Exemption statute. 

• It provides the owner/occupier of a home, which includes condominiums and mobile homes, with a $15,000 exemption. If there are two or more owners, an additional $15,000 exemption is allowed. If the debtor owns a $250,000 house with a $245,000 mortgage, he cannot lose it to his creditors or a bankruptcy trustee as long as he is current on his mortgage payments. 

• However, the $35,000 used mobile home which the client just finished paying off may be taken either by creditors or by the trustee. Upon the sale of the property, the client would be awarded his homestead exemption, $15,000, and the balance of the proceeds would be used to pay the creditors.

• Illinois also recognizes a tenancy by the entirety ownership in property that is the debtor’s principal residence. A property that is owned in a tenancy by the entirety is a property that is jointly owned by a married couple or the parties to a civil union as a marital entity and is not owned separately by each. If a couple has a tenancy by the entirety ownership in their home or real estate, then that property will be exempt as long as there are not any debts that are jointly owed.

• A renter can claim a security deposit paid to the landlord as exempt under this section.

735 ILCS 5/12–1001 deals with personal property exemptions, other than retirement accounts. This statute is extremely important to the debtor because it lists what cannot be lost to a creditor. 

The personal property enumerated here is what the Illinois legislature has determined to be the minimum everyone has a right to retain, no matter what they owe or whom they owe it to. 

The most common and important exemptions are as follows:

• Personal property, including family pictures, school books, professionally prescribed health aids, and necessary wearing apparel;

• A "wildcard exemption" of $4,000 worth of any other property, not including wages that have been garnished. This is called the "wild card exemption" because the debtor has the right to choose the exempt property. It could be a bank account, a tax refund, household furniture and furnishings, jewelry, furs, collections, or anything or any combination of things as long as the total value does not exceed $4,000;

• A motor vehicle exemption of $2,400 is included. If your client owns a car worth $40,000 but owes $39,000 on it, it cannot be taken.  However, a $6,000 car which the client owns free and clear is at risk, at least theoretically. Note also that the $4,000 "wild card" exemption can be "stacked" on top of the $2,400 motor vehicle exemption to create a $6,400 equity exemption of a motor vehicle; 

• Tools of the trade of the debtor which do not exceed $1,500. These are items that a person uses to make a living;

• Life insurance proceeds payable to a wife or husband or a child, parent, or another person dependent upon the deceased;

• Social security, unemployment compensation, public assistance, veteran’s benefits, disability or illness payments and alimony or support payments reasonably necessary for the support of the debtor and any of the debtor’s dependents. This includes the earned income tax credit In re Royal, 397 BR 88 (Bankr. N.D. Ill. 2008); In re Brockhouse, 220 B.R. 623 (Bankr.C.D.Ill.1998); In re Fish, 224 B.R. 82 (Bankr.S.D.Ill.1998); 

• A payment of up to $15,000 for personal injury is exempt.

All of these exemptions also apply to what a trustee may take from the debtor’s estate in a bankruptcy case. In reality, however, if the trustee finds the debtor’s assets just slightly exceed the statutory exemptions, the trustee may determine that it is not worth their time and expense to pursue the applicable asset. 

Of course, what "just slightly" means depends on the case and the trustee. While we try to make sure that everything a client owns fits into one of the exempt categories when we file bankruptcy, a client with as much as a few thousand dollars in non-exempt personal property, furniture, and furnishings, for example, may well be able to keep everything he owns.

Pensions and retirement accounts are exempt under 735 ILCS 5/12-1006. Most are also exempt under 11 U.S.C. § 522(b)(3)(B).

• People in financial distress often see their retirement accounts as a ready pool of cash that they believe will save them from having to file Chapter 7 or Chapter 13 bankruptcy to get a handle on their debts.

• But their attempt to "do the right thing" by using their retirement funds to pay down unsecured debts will likely end up costing them more than if they file bankruptcy. They often don't realize that withdrawing money from retirement funds can carry a hefty tax penalty if they're under retirement age and fail to pay back the money they borrowed.

• Potential bankruptcy filers often don't understand that most of their debts, particularly unsecured debts like medical bills and credit card balances, will be eliminated (discharged) in a bankruptcy. The money in their retirement funds is actually protected (exempted) from the reach of creditors. Therefore, bankruptcy protection will allow them to get rid of the debt (and the debt collectors) but preserve an important asset.

Even if you can't entirely exempt an asset, the trustee might still choose to abandon it (decide not to take it) if liquidating it won't net a worthwhile payment to creditors. 

This usually happens when the property value is slightly higher than the exemption amount after considering sales costs.

If the trustee abandons the property, you get to keep it.

• If you can't exempt property that you'd like to keep, the bankruptcy trustee might agree to allow you to purchase it at a discount (the asset's value minus the costs and fees related to the sale). 

• You'll need to demonstrate that you're using funds that aren't a part of the bankruptcy estate, such as post-filing wages or a loan from a family member or friend.

The meeting of creditors allows the bankruptcy trustee, the person assigned to oversee your case, to verify your petition's accuracy and make sure that you were the person who filed it. 

The meeting of creditors also allows the trustee and creditors to ask the debtor questions about the bankruptcy case.

The court sets the creditors' meeting shortly after you file, which will occur 30-45 days later. 

If you have a straightforward case, you'll spend less than ten minutes speaking with the trustee.

• The meeting of creditors is an informal appearance and won't occur in a courtroom before a judge. Instead, the trustee sits at a conference table in front of a hearing room, and you'll wait in the audience with other debtors until the trustee calls your matter. Trustees usually schedule about ten Chapter 7 cases during the same hour, fewer if the trustee handles Chapter 13 cases.

• When you arrive, check the calendar outside the hearing room. Unless you're first on the list, you can watch several hearings before the trustee calls your case. 

• If you're attending online or by telephone, your ability to watch or listen to other meetings will depend on how your court sets up the call.

• The primary documents you'll need at the mandatory "meeting of creditors" or "341 hearing" are those needed to prove your identity to the bankruptcy trustee assigned to your case. (11 U.S.C. § 341.) 

• When you will provide them will depend on whether you attend an in-person or virtual meeting.

• However, those aren't the only documents you'll provide after filing your case. Bankruptcy law outlines the financial documents you must copy and forward to the bankruptcy trustee before the meeting.

• The list is minimal, and trustees can—and do—ask for additional documents. You'll bring anything you didn't or couldn't provide before the meeting to the meeting itself.

• This article explains more about identification requirements at the hearing, the documents the trustee will want beforehand, and items you might need to provide after attending the 341 meeting of creditors.

The bankruptcy trustee, the person tasked with administering your case, must ask all bankruptcy filers mandatory questions at the 341 meeting. Here are the questions you can count on being asked: . 

• Is the address on the petition your current address?
• Did you sign the petition, schedules, statements, and related documents and is the signature your own?
• Did you read the petition, schedules, statements, and related documents before you signed them?
• Are you personally familiar with the information contained in the petition, schedules, statements and related documents?
• To the best of your knowledge, is the information contained in the petition, schedules, statements, and related documents true and correct?
• Are there any errors or omissions to bring to my attention at this time?
• Are all of your assets identified on the schedules? Have you listed all of your creditors on the schedules?
• Have you previously filed bankruptcy?
• What is the address of your current employer?
• Is the copy of the tax return you provided a true copy of the most recent tax return you filed?
• Do you have a domestic support obligation? To whom?
• Have you read the Bankruptcy Information Sheet provided by the United States Trustee?

Along with the mandatory questions, trustees typically ask about your property and other assets, income, expenses, and debts. Other areas will include discrepancies in your bankruptcy forms and how you came up with a value for various property items.

Many trustees' inquiries about your particular case will come from a list of suggested questions trustees can ask when appropriate. The meeting of creditors also allows the trustee and creditors to ask the debtor questions about the bankruptcy case.

Here are some of the questions on the list:

• Do you own or have any interest whatsoever in any real estate?
• Have you made any transfers of any property or given any property away within the last one-year period (or such longer period as applicable under state law)?
• Does anyone hold property belonging to you?
• Do you have a claim against anyone or any business?
• Are you the plaintiff in any lawsuit?
• Are you entitled to life insurance proceeds or an inheritance as a result of someone's death?
• Does anyone owe you money?
• Have you made any large payments, over $600, to anyone in the past year?
• At the time of the filing of your petition, were you entitled to a tax refund from the federal or state government?
• Do you anticipate that you might realize any property, cash or otherwise, as a result of a divorce or separation proceeding?

Click link to view for the complete 341 meeting question list.

In most respects, filing for bankruptcy in Illinois isn't different from filing in another state. The bankruptcy process falls under federal law, not Illinois state law, and works by unwinding the contracts between you and your creditors. That's what gives you a fresh start. 

But Illinois's laws come into play in a significant way because they determine the property you can keep in your bankruptcy case. You'll also need to know other filing information, which we explain after reviewing some basics. 

Chapter 7 is often a bankruptcy filer's first choice for several reasons. It's quick, taking only a few months to complete. And it's cheap. You don't pay anything to creditors.

• Chapter 7 bankruptcy works well for people who own mainly the essential items needed to live and work and not much else. 

• People with more assets could lose them in Chapter 7 because the Chapter 7 Trustee, the official responsible for the case, sells unnecessary luxury items and distributes the proceeds to creditors. For instance, you might have to give up your RV, baseball card collection, or timeshare in the Bahamas, even your house or vehicle if you have more equity than you're allowed to keep.

• Chapter 7 has no payment plan option for catching up on late mortgage or car payments. So you could lose your home or car if you're behind on the loan when you file.

Bankruptcy wipes out many bills, like credit card balances, overdue utility payments, medical bills, personal loans, and more. 

You can even get rid of a mortgage or car payment if you're willing to give up the house or car that secures the debt. (Putting property up as collateral creates a "secured debt." If you don't pay what you owe, the lender recovers the property.)

Also, student loans aren't easy to wipe out because you'd have to win a separate lawsuit (however, in 2023, steps have been taken to ease the student loan discharge process with a new student loan bankruptcy form).

Learn more about student loans in bankruptcy.

Most people file a bankruptcy case when they need to put financial problems behind them and get a fresh start. Part of that fresh start often involves improving a credit score, and filers can take positive steps by paying bills on time and keeping credit balances low. It can take up to ten years for the bankruptcy to fall off your credit report, depending on the bankruptcy chapter you file 

What's On Your Credit Report?

You might be surprised at the amount of personal data your report contains. Specifically, you'll see three types of information:

• identifying information, including your current and past addresses and employers
• credit accounts and your payment history (such as accounts marked paid as agreed or charged off), and
• public records, like judgments, tax liens, and bankruptcies.

Bankruptcy Reporting on a Credit Report

• Negative entries, like slow payments and charge-offs, will disappear from your report after seven years. It works differently for bankruptcy filings and depends on the particular chapter.

• Chapter 7 bankruptcy. The fact that you filed a Chapter 7 bankruptcy will stay on your credit report for up to ten years. At the ten-year mark, the credit bureaus should stop reporting the bankruptcy.

• The immediate effect of bankruptcy on your credit score will depend on whether you initially had a high or a low score, and, in most cases, a higher initial score will take a bigger hit. The exact effect is hard to predict because scoring companies keep the formulas used to calculate scores somewhat secret. However, if you're diligent, you can reach a credit score in the 700s (very high) just two or three years after you file your Chapter 7 matter.

Checking a Credit Report for Accuracy

• It's prudent to review your credit report occasionally, even if you aren't considering bankruptcy. One way to check is by taking advantage of the free copy from each of the three major credit bureaus—Experian, TransUnion, and Equifax—that you're entitled to once per year at no cost. The website for ordering your credit reports is www.annualcreditreport.com.

• It's important to review all three carefully because not all creditors report to all three agencies. A few months after filing your bankruptcy, each of your creditors should note that the account was included in bankruptcy. If not, it's a good idea to have that corrected because any line item that appears open but unpaid could lead a potential lender to believe you're still responsible for paying that debt.

• Your credit report should also identify whether your Chapter 7 bankruptcy case was discharged (your qualifying debts got wiped out) or dismissed. A successful bankruptcy that leads to a discharge affects a potential lender's decision to grant you credit differently than if the bankruptcy had been dismissed, leaving your account liability intact.

• It's a good idea to address any errors you see as soon possible. You can do this by disputing the item, either through the credit bureau's website or by sending a letter directly.

Bankruptcy wipes out many bills, like credit card balances, overdue utility payments, medical bills, personal loans, and more. 

You can even get rid of a mortgage or car payment if you're willing to give up the house or car that secures the debt. (Putting property up as collateral creates a "secured debt." If you don't pay what you owe, the lender recovers the property.)

Also, student loans aren't easy to wipe out because you'd have to win a separate lawsuit (however, in 2023, steps have been taken to ease the student loan discharge process with a new student loan bankruptcy form).

Learn more about student loans in bankruptcy.

If you're considering bankruptcy, it's important to learn what not to do before filing bankruptcy. 

The list of things to avoid before bankruptcy includes the following:

• file at the wrong time
• use retirement funds unnecessarily
• prepare bankruptcy paperwork carelessly or incorrectly
• purchase luxury goods and services on credit or take cash advances
• sell or transfer property for less than it's worth
• pay only your favorite creditors
• file before receiving a valuable asset, like an inheritance, and
• fail to file your tax returns.

Even though erasing credit card debt in bankruptcy is one of the primary reasons people choose to file, purposely running up credit card debt before filing for bankruptcy is a bad idea. 

Here's why.

• A bankruptcy discharge wipes out all credit card debt at the end of the case. It doesn't matter if the debt is $1,000 or $100,000. Your responsibility to pay the outstanding balance will be gone (although you might have to return jewelry, electronics, or furniture if you agreed the purchase would secure payment of the debt).

• However, a significant exception exists. If you rack up credit card debt with fraudulent intent, you should assume the bankruptcy court won't discharge it in bankruptcy. Charging on your credit card with no intention of paying the debt, especially when planning to file for bankruptcy, is almost always considered fraud.

• You'd be wise to avoid running up credit card balances before filing if you'd like your bankruptcy case to go smoothly. Charging purchases shortly before a bankruptcy case is one of the red flags your creditors and the bankruptcy trustee appointed to your case will be looking for. It's one of the more common inappropriate acts people tend to engage in before filing.

• If you run up credit card balances before bankruptcy, the credit card company can file a lawsuit asking the bankruptcy court to declare the debt "nondischargeable." If the credit card company wins, you'll remain responsible for paying your credit card bill after your case ends.

Even though erasing credit card debt in bankruptcy is one of the primary reasons people choose to file, purposely running up credit card debt before filing for bankruptcy is a bad idea. 

Here's why.

• A bankruptcy discharge wipes out all credit card debt at the end of the case. It doesn't matter if the debt is $1,000 or $100,000. Your responsibility to pay the outstanding balance will be gone (although you might have to return jewelry, electronics, or furniture if you agreed the purchase would secure payment of the debt).

• However, a significant exception exists. If you rack up credit card debt with fraudulent intent, you should assume the bankruptcy court won't discharge it in bankruptcy. Charging on your credit card with no intention of paying the debt, especially when planning to file for bankruptcy, is almost always considered fraud.

• You'd be wise to avoid running up credit card balances before filing if you'd like your bankruptcy case to go smoothly. Charging purchases shortly before a bankruptcy case is one of the red flags your creditors and the bankruptcy trustee appointed to your case will be looking for. It's one of the more common inappropriate acts people tend to engage in before filing.

• If you run up credit card balances before bankruptcy, the credit card company can file a lawsuit asking the bankruptcy court to declare the debt "nondischargeable." If the credit card company wins, you'll remain responsible for paying your credit card bill after your case ends.

Bankruptcy laws make it easy for creditors to force you to reimburse them for luxury charges and cash advances made before bankruptcy. Even when you run up credit card balances without intending to defraud the creditor, for example, if you truly intended to pay for the ski boots when you bought them, you might still get in trouble.

Here are the rules:

• Suppose you use your credit cards within 90 days before bankruptcy for luxury goods and services totaling more than $800. In that case, the bankruptcy court would presume you committed fraud (figures apply to cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. § 523(a)(2)(C)(i)(l).)

• The bankruptcy court will also presume fraud if you take cash advances of more than $1,100 within 70 days before filing bankruptcy (amounts apply to cases filed between April 1, 2022, and March 31, 2025). (11 U.S.C. § 523(a)(2)(C)(i)(l).)

• But an exception exists. You can charge purchases for necessary goods and services. When you use a credit card to buy something you or your family needs, the credit purchase still qualifies for a bankruptcy discharge.

• A bankruptcy creditor can sue under a fraud theory for various reasons, including if you charge goods or services without intending to pay the bill. The charges don't need to be for luxury goods and services, and they can occur at any particular time (other than those imposed by the statute of limitations). However, the creditor would need to prove you intended to commit fraud.

• By contrast, a creditor who can rely on "presumptive fraud" isn't required to prove intent. Engaging in a particular act is enough to imply or presume fraud. For instance, the bankruptcy court will presume fraud if a debtor uses a credit card to make luxury purchases of $800 or more within 90 days of the bankruptcy filing. The presumption gives a creditor an advantage because proof of intent isn't needed.

• Because the burden of proof is eased in a presumptive fraud matter, most cases settle out of court with the debtor agreeing to pay some or all charges. 

Although it occurs in only a small percentage of cases, most bankruptcy fraud has some connection with a debtor's attempt to avoid paying creditors by concealing assets or abusing the system. For instance, bankruptcy fraud can occur as a result of:

• purchasing an item on credit with no intention to pay for it
• transferring property to someone for less than its actual value
• overreporting income before filing for bankruptcy, or
• inaccurately reporting property or income in bankruptcy.

Other offenses include destroying records, falsifying documents filed in court, using false identity information, bribing court officials, and stealing from the bankruptcy estate.

It isn't just the debtor who can run afoul of the law. Creditors sometimes knowingly file false proof of claims to collect money not owed. Lawyers sometimes attempt to bribe the bankruptcy trustee (the official overseeing the case) or the bankruptcy judge. And trustees have raided funds they've collected on behalf of creditors. 

Civil actions are often brought by a single creditor seeking a remedy against a debtor for an isolated action (instead of a broader action filed by the Department of Justice). For instance, a creditor might claim that the debtor lied about income when requesting credit or show that the debtor never intended to repay an obligation.

The level of proof necessary to bring civil sanctions against a debtor or others in the bankruptcy court is much lower than what the DOJ must prove in a criminal case. Therefore, regardless of whether there is a criminal proceeding, the bankruptcy court has at its disposal several options:

• Dismiss the bankruptcy case. The bankruptcy court can dismiss a matter on its own motion or the motion of a creditor or the trustee. The judge can also impose a restriction that would prevent a new case filing for some time (or permanently in a particularly egregious matter)—a common remedy when a debtor has tried to avoid paying a creditor by repeatedly filing and dismissing a case.

• Deny discharge. The bankruptcy court can also deny your overall bankruptcy discharge (the order that wipes out debt) or the discharge of a particular debt. A denial of discharge will allow the creditor to collect the debt after the bankruptcy case.

• Other remedies. The bankruptcy code allows the judge to enter whatever orders are necessary in the bankruptcy case, including the power to hold a party in contempt of court. A finding of contempt usually brings a fine and might include an injunction that stops someone from doing a particular action. For instance, the court could deny a creditor's claim, hold the creditor in contempt for filing a false claim, and enjoin the creditor from filing any further claims

 A criminal bankruptcy fraud case will tend to involve a more elaborate scheme than the average person would attempt, with the debtor knowingly executing a plan impacting numerous, if not all, creditors. 

And it doesn't happen in a vacuum. The actions leading to prosecution for bankruptcy crimes can violate other federal statutes. 

• For instance, an indictment for bankruptcy fraud often includes counts for perjury, tax fraud, bank fraud, wire mail fraud, identity theft, and conspiracy, bringing a schedule of penalties adding years to sentences imposed for bankruptcy crimes.

The Federal Bureau of Investigation (FBI) investigates bankruptcy crimes. If it appears that a crime has been committed, the case will proceed to the U.S. Department of Justice (DOJ) for prosecution. 

If convicted, sentencing for a conviction could include any or all of the following:

• probation or special monitoring
• up to twenty years in federal prison
• a fine of $250,000 for each count
• an order to pay restitution, and
• community service.

CASE EXAMPLE:

In a well-known bankruptcy case, Joe and Teresa Giudice (from the Real Housewives of New Jersey) pleaded guilty to 41 federal counts of criminal behavior, including bankruptcy fraud. 

At sentencing, Mrs. Giudice received 15 months in prison, while her husband received 41 months. 

Together, they were ordered to pay restitution of $414,000. The court allowed them to serve the sentences consecutively (one following the other) so that a parent would remain home to care for their young children during incarceration.

Bankruptcy fraud, a federal felony, is serious and carries significant penalties that can affect your life for years, well beyond any benefit from committing the crime.