Helpful Articles
Chapter 7 or Chapter 13?
Chapter 7 Bankruptcy
For those who qualify, Chapter 7 Bankruptcy is available to aid individuals and families struggling with credit card debt, payday loans, medical bills, and other types of unsecured debt. Chapter 7 Bankruptcy is commonly known as a “liquidation.” Once a Chapter 7 Bankruptcy case is filed, a Trustee is assigned to determine whether there are any assets in the debtor’s estate to “liquidate (sell)” and partially satisfy the debts owed to creditors.
Many assets are protected from the reach of the Trustee by applying what are called exemptions. In Illinois, a number of exemptions are available to consumers to protect their assets from being taken and liquidated. Because asset protection is so important, consulting with an attorney who can properly assess what exemptions apply is highly advisable.
In a “no asset” case, a Chapter 7 Bankruptcy discharges a consumer’s unsecured debts without requiring the consumer to pay anything to their creditors. Certain unsecured debts, however—including student loan debt, child support/spousal support payments, and most tax debt—do not qualify for a Chapter 7 Bankruptcy discharge. Nonetheless, for many debtors who qualify, Chapter 7 Bankruptcy is a worthwhile option to eliminate most unsecured debt, providing you with the fresh start and financial freedom you seek.
Do I qualify?
In 2005, Congress enacted the Bankruptcy Reform Act, making it more difficult for consumers to file for a Chapter 7 Bankruptcy. This Act, also known as the “Bankruptcy Abuse Prevention and Consumer Protections Act,” focused on the Means Test as a way to determine eligibility. The Means Test uses a formula to analyze whether a person’s income is low enough to file for a Chapter 7 Bankruptcy.
If it turns out that you do not qualify under the Means Test to file for a Chapter 7 Bankruptcy, contact an attorney to discuss alternative debt relief options that may be available to you.
Chapter 13 Bankruptcy
A Chapter 13 Bankruptcy is otherwise known as a “reorganization.” When a Chapter 13 Bankruptcy is filed, a proposed Chapter 13 repayment plan is also filed along with the petition, or shortly thereafter. This plan requires a debtor to make monthly payments to the Trustee, who then distributes the payment among all the debtor’s creditors for a period of three to five years.
After the appropriate deadlines have passed, the Court determines whether the Chapter 13 Plan is approved, or confirmed. The Chapter 13 Plan is confirmed when all issues between the parties with respect to the Plan have been resolved. Once the Chapter 13 Plan has been confirmed, all parties are bound by the terms of the Plan.
The Trustee will hold the payments you make to him/her/them until the Chapter 13 Plan has been confirmed. Even after a Plan has been confirmed, the length of time established by the Plan may be shortened or lengthened, depending on a debtor’s individual circumstances. Chapter 13 Plans may also be modified due to changes in income or other life events. If, however, the Chapter 13 Plan is unsalvageable due to the inability to continue making planned payments, the Chapter 13 Bankruptcy Case will be dismissed. Creditors will then be entitled to resume their collection activity, including car repossession, home foreclosure, and the garnishment of wages.
