Filing for bankruptcy is a last resort for families in economic straits, but the process is also one of renewals and provides an opportunity to get a fresh start away from endless bills, harassment from debt collectors, and the emotional turmoil of debts you can't pay.
Understanding the two major types of consumer bankruptcy will allow you to file smartly and to choose the strategy that's best for your personal or family's circumstances.
Do you own a home? Are your debts secured or unsecured? Are you employed? How much debt do you owe?
The answers to these and other questions will determine whether you should file for Chapter 7 or Chapter 13 bankruptcy, and whether bankruptcy is even the best choice for you.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a form of liquidation that uses your assets to satisfy debts. Some assets you own are protected and are exempt from liquidation, and Illinois has its own set of protected assets, just like every other state in the country.
Even if your assets aren't enough to cover all of your debts, once your Chapter 7 bankruptcy has been finalized, your debts are considered satisfied, and creditors can't try to collect from you anymore.
If you don't own a house and your only true assets are an old car and your simple possessions, Chapter 7 bankruptcy could provide you with a fresh start and the ability to start rebuilding your financial health and wealth.
Common terms in Chapter 7 Bankruptcy:
- Means Test. A mathematical equation will determine whether your current assets or income is low enough to qualify for Chapter 7 bankruptcy.
- Bankruptcy Trustee. This individual is assigned by the court and will sell your assets to make payments to your creditors.
- Bankruptcy Discharge. After your assets have been sold and used to pay creditors, the remaining debts will be cancelled through a discharge, and you'll have your fresh start.
Note: Not all debts can be discharged through Chapter 7 bankruptcy. Student loans guaranteed by the federal government, certain tax debts, and child or spousal support cannot be discharged in bankruptcy.
The Pros and Cons of Chapter 7 Bankruptcy
Like any major financial change, bankruptcy will change your life. Chapter 7 bankruptcy has some amazing benefits, but it's not without its limitations. Here are the benefits and challenges you'll face when you file for Chapter 7 bankruptcy.
Benefits of Filing for Chapter 7 Bankruptcy
- Eliminate Debt: Filing Chapter 7 Bankruptcy puts you in control of your future financial security. A discharge can take care of money owed on credit cards, medical bills, personal unsecured loans and many other types of unsecured debt.
- Help with Crippling Medical Bills: People who've experienced an illness or injury and found themselves buried in bills (even if they have health insurance) may consider filing for Chapter 7 Bankruptcy as a way to get out of debt. A recent study by Professor Elizabeth Warren of Harvard Law School found that over half of all bankruptcies are related to illness, and 75% of those people who end up filing because of medical bills have health insurance. If you do not have insurance and are overcome with medical bills, Chapter 7 can help you eliminate those debts.
- Stop Harassing Behavior from Creditors and Collection Agencies: According to the Federal Trade Commission, Federal law dictates how and when a debt collector may contact you: not before 8 a.m., after 9 p.m., or while you’re at work if the collector knows that your employer doesn’t approve of the calls. Collectors may not harass you, lie, or use unfair practices when they try to collect a debt. And they must honor a written request from you to stop further contact. And this is before you file!! The minute you file bankruptcy the Bankruptcy Court issues an order telling all of your creditors to leave you alone. No more phone calls. No more collection letters. No more lawsuits. No garnishments. No repossessions. No foreclosures. Nothing.
- Bankruptcy is Not a Reason to be Fired: What does bankruptcy mean for your work status? In Chapter 7 bankruptcy a debtor may fear for their job safety if their bankruptcy filing is discovered at work. However, you cannot be fired from your job solely because you filed for bankruptcy.
- No Repayment Necessary: In Chapter 7 Bankruptcy, if the new bankruptcy laws are complied with, then you aren’t required to offer a monthly repayment to your creditors. This is especially beneficial if you are currently unemployed or have minimal disposable income.
- Get Your Driver’s License Back: Chapter 7 Bankruptcy helps you keep or regain your driver’s license subject to revocation because of an unpaid accident judgment, which may mean employment and income for your family.
Limitations and Challenges of Chapter 7 Bankruptcy
- Credit Hit: Bankruptcy information (both the date of the filing and the later date of discharge) stay on a credit report for 10 years and can make it difficult to get credit, buy a home, get life insurance, or sometimes get a job.
- Liquidation: A bankruptcy trustee can liquidate your unprotected assets to pay part of your bills. Luckily, Illinois law provides a number of exemptions, and most people who file for Chapter 7 Bankruptcy don’t have unprotected assets. A Chapter 7 attorney can help you determine if your assets are protected by these exemptions.
- Non-Dischargeable Debts: You may not be able to discharge certain debts, including child support, student loans and most types of tax related debt. You’d need to check with an attorney to discover which debts are exempt.
- Liens: Liens such as your mortgage are not automatically discharged. If you want to continue to own your home or car, you will need to continue making payments. However, an attorney can help negotiate a reaffirmation agreement with your lien holders where you continue to make payments in exchange for keeping your property.
Choosing an Attorney When Filing for Chapter 7 Bankruptcy
Most attorneys offer a free consultation regarding bankruptcy and will speak with you about your options and whether it's a good idea to file. Asking your attorney some important questions will help you decide whether that legal professional is the right one for your case.
Just like you should never go to the doctor without a list of questions in hand, you'll also want to be inquisitive and probing when you speak with a lawyer. Consider the following essential questions to ask a bankruptcy attorney in Chicago.
- How Long Have You Been Practicing Bankruptcy Law? If they've been around beyond 4-5 years, they're doing something right. While you shouldn't necessarily be wary of a new firm, there are potentially increased risks involved.
- What Percentage of Your Practice is Devoted to Bankruptcy Law? Finding out how devoted (and therefore experienced) a law firm is in the area of bankruptcy is important. You also wouldn't want to necessarily go with a firm whose best attorneys focus on other areas.
- What Percentage of Your Practice has Been Focused on Bankruptcy Since the New Laws Went Into Effect in 2005? Things have changed quite a bit since the new bankruptcy laws went into effect. You need to find an attorney who is up to date and well-versed in the new laws.
- On Average, How Many Bankruptcy Cases Do You Handle Per Month? Again, you want someone who handles a good deal of cases, but isn't overburdened with cases.
- Do You Have Malpractice Insurance? You need to hire someone who does!
- What Makes Your Bankruptcy Practice Different From Your Competition? You want a law firm that both understands bankruptcy in Illinois and is sensitive to your needs. An attorney who doesn't make an effort to stand out and doesn't seem particularly focused on understanding your situation should raise red flags. Chances are they'll also halfheartedly represent you.
- Can You Provide References for Clients Whose Bankruptcy Cases Were Similar to Mine? A good bankruptcy law firm should jump at the chance to provide references who'll rave about their great work and how much money and time they saved. If they aren't comfortable providing references or are dragging their feet, you may want to move on.
- Is Bankruptcy a Good Idea for me, Based on my Unique Situation? Everyone is different, and bankruptcy may or may not be right for you. Your financial future hangs in the balance, and you need an honest answer from an attorney who has your best interest in mind.
- What are the Downsides to Bankruptcy? Bankruptcy will negatively impact your credit score. The better your credit before bankruptcy, the harder the hit you'll take. Chapter 7 will stay on your credit report for 10 years, Chapter 13 for 7 years. Your bankruptcy attorney should be able to fill you in on other issues unique to your situation.
- Which of my Debts Can I Expect to be Discharged Through Bankruptcy? Bankruptcy discharges most unsecured debt, including credit cards and other unsecured loans. However, Chapter 7 will not discharge taxes, tax liens, student loans, alimony, child support or debt incurred through fraud, among others. Chapter 13 will not discharge certain taxes, child support, alimony, student loans, fines and restitution, or debt incurred through fraud, among others.
- Who Will Work on my Case? If someone else will be assigned to your case than the person you're speaking with in your initial free consultation, you need to find out immediately. Chemistry can be important, and you need to feel comfortable working with your bankruptcy attorney. Keep in mind that other attorneys in the firm may help, and paralegals and other support staff typically assist as necessary.
- Who Will Accompany me in Court? The attorney representing you in court should be the same one you primarily work with. Again, you should be informed about these types of issues right off the bat.
- What are my Responsibilities, as the Client, in Helping to Strengthen my Case? Believe it or not, you have an active role in the success of your case. You need to be fully involved and communicative with your attorneys and anyone else involved in the bankruptcy proceeding. Finding out exactly what this entails is the first thing you should do.
- Will Filing Bankruptcy Affect my Ability to Get a Job? Your attorney should inform you of the risks bankruptcy can open you up to. For example, while bankruptcy law prohibits discrimination based upon a debtor filing for protection under bankruptcy law, an employer is within their legal right to request a copy of your credit report. This may or may not have an informal effect on your ability to get hired.
Need Help With Chapter 7 Bankruptcy?
Is the thought of bankruptcy keeping you up nights? Unsure how to file or which type of bankruptcy might be best for you? Request a Free, No Obligation Legal Consultation today! There are no hidden fees, no obligations, no pressure and no risk in this consultation.
DISCLAIMER: All information on this website is provided for informational purposes only and are not intended to be construed as legal advice. Suburban Legal Group PC shall not be liable for any errors or inaccuracies contained herein, or any actions taken in reliance thereon.