Most individuals who seek debt relief via bankruptcy choose to file under Chapter 7 or under Chapter 13 of the U.S. Bankruptcy Code. The basic difference between the two is that under Chapter 7, a filer’s debts, with some exceptions, are eliminated. Under the Chapter 13, the intent is to come up with a payment plan to pay back the filer’s debts. Because bankruptcy is a federal procedure modified by state laws, a Chicago bankruptcy proceeding will be similar to one elsewhere in the state.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, most debts are discharged. This means that the debt is completely eliminated. There are debts that will not be discharged, however. These exceptions include:
- Income tax debts
- Child and spousal support
- Student loans
- Liens like mortgages and car loans
- Property tax and other local tax debts
Because debts are being discharged, the court may require that some of a debtor’s personal property be sold to pay off some of their debts. The law allows some property to be exempted from being sold. As with every state, Illinois has its own rules concerning what property may be exempted. Because the exemptions are determined by the state and not locally, a Chicago bankruptcy will not differ significantly from one filed in other areas.
To be able to file under Chapter 7, a debtor has to pass a means test. The individual who is filing must calculate their income and find out where it falls compared to the median state income. The median is the income level at which there is an equal number of people with higher incomes as people with lower incomes.
If a filer’s income is less than the median, they are allowed to file under Chapter 7. If it is greater than the median, they will have to factor in the debtor’s expenses to determine their disposable income. This is the amount of money the debtor would have left each month to pay creditors. If the debtor’s disposable income is above a certain amount, they have to file under Chapter 13. Otherwise they will have the option of filing under either chapter.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, the filer has to come up with a payment plan to repay as much of their debt as possible. Depending on the results of the means test in these cases, payments may be set up for either three or five years. At the end of this time, most remaining debts will be discharged. As with Chapter 7, there are some debts that will not be discharged.
There are advantages and disadvantages to each type of bankruptcy, and there are many factors that go into deciding which route to take or if a filer will even have a choice. Bankruptcy is a very complex procedure. Most people will benefit from the advice of an attorney who specializes in bankruptcies.