Chapter 7 Bankruptcy: Understanding the Basics

Dealing with overwhelming debt can be a stressful and overwhelming experience. Fortunately, there are options available to help you get back on your feet financially. One such option is Chapter 7 bankruptcy, a type of personal bankruptcy that allows individuals to discharge most of their unsecured debts, such as credit card debt, medical bills, and personal loans. In this article, we'll explore what Chapter 7 bankruptcy is, how it works, and its pros and cons.

Qualifying for Chapter 7 Bankruptcy

To qualify for Chapter 7 bankruptcy, you must meet certain income and asset requirements. Specifically, you must pass the "means test," which is a test that determines whether you have the ability to repay your debts. If your income is below the median income for your state, you pass a hurdle needed to qualify for Chapter 7 bankruptcy. If your income is above the median, you may still be eligible if you can demonstrate that you do not have the ability to repay your debts.  But even if you are over the mean, you may still qualify for a bankruptcy.  We just have to work the numbers.

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Will I lose my home, car or other property in a Chapter 7 Bankruptcy?  What are bankruptcy Exemptions?

If you're considering filing for bankruptcy in Illinois, it's important to understand the bankruptcy exemptions. Bankruptcy exemptions are protect the assets and property from being sold by the bankruptcy trustee to pay off your creditors.

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Exemptions are available to protect some of these assets, but you have to ensure you properly claim or handle the asset.  For example, child-support received is a protected asset, but if you received a large child support payment and mixed it with 1 penny of your non-exempt money, now that child-support can be lost. 

 

Exemptions can be complicated and often not what you would expect.  For example, are expensive wedding bands "jewelry" entitled to a $1500 exemption?  Or are they considered "necessary wearing apparel" entitled to a more generous exemptions. Read here to find out how Donald Trump's behavior, a proclamation from the Queen's Palace and not wearing a wedding ring to a bankruptcy 341 all developed into wedding bands being considered necessary wedding apparel under Illinois Bankruptcy Law.  The Bankruptcy code and law is full of such fun facts and traps.

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There are many exemptions, and here are the major categories:

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Homestead Exemption

The homestead exemption in Illinois protects up to $15,000 of equity in your primary residence.  For joint Debtor, the amount is doubled to $30,000.  In practice, because it costs real-estate commission fees and closing costs to sell a property, most trustees realistically stretch the amount of equity you are allowed to keep beyond the basic exemption amounts.

Personal Property Exemptions

In Illinois, you can protect up to $4,000 in personal property, including clothing, furniture, and household goods or any property.  It's commonly called the wildcard exemption. In addition, you can also exempt up to $2,400 in a motor vehicle. Additionally, tools of the trade, including books, tools, and instruments, are protected up to $1,500.

Retirement Accounts

In Illinois, most types of retirement accounts, including 401(k)s, IRAs, and pensions, are fully exempt from bankruptcy. This means that these accounts are protected regardless of their value.

Insurance Benefits

Certain insurance benefits are also protected in Illinois bankruptcy proceedings. For example, life insurance benefits are fully exempt, as are disability benefits, fraternal society benefits, and health and accident benefits.  The key is the beneficiary and often this requires a thorough reading of your policy.

Public Benefits

Certain public benefits, such as Social Security, unemployment benefits, and public assistance, are exempt from bankruptcy in Illinois.  This also extends to Child Tax Credits on a tax refund and other similar payments.

Workers Compensation
​Workers Compensation payments are exempt but if you receive a settlement, do not deposit the money into another account that has non-exempt money in it.  Otherwise, by co-mingling the workers compensation settlement, you will lose the exempt status.

Personal Injury

Personal injury claim settlements are protected up to $15,000.

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It's important to note that these exemption amounts are subject to change, so it's important to consult with a bankruptcy attorney or the bankruptcy court to ensure that you have the most up-to-date information.  

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Understanding the Illinois bankruptcy exemptions is crucial if you're considering filing for bankruptcy. By protecting your assets and property, you can have a better chance of starting fresh after your debts are discharged. However, it's important to consult with a bankruptcy attorney to ensure that you're taking full advantage of the available exemptions and to understand any limitations or exceptions that may apply.

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What isn't discharged?

While Chapter 7 bankruptcy can discharge many types of unsecured debts, there are several categories of debts that are not "wiped-out" or discharged.  For example, taxes are typically not discharged, but this isn't always the case. This is also the same for debts such as student loans which have a very high bar to qualify for a discharge although recent changes are making student loan discharges a possibility.  The major categories of non-dischargeable debt are:

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1. Child support and alimony payments

2. Debts for personal injury or death caused by your intoxicated driving

3. Most tax debts (there are exceptions)

4. Student loans (with few exceptions and this is changing!)

5. Court fines and penalties

6. Debts incurred through fraud, theft, or other illegal activities

7. Debts owed to certain tax-advantaged retirement plans

8. Debts incurred for luxury goods right before your bankruptcy

 

It is important to note that even if a debt is dischargeable in bankruptcy, there may be exceptions or limitations that apply. For example, while credit card debt is generally dischargeable, if you made luxury purchases or cash advances shortly before filing for bankruptcy, those debts may not be dischargeable. It is important to consult with a bankruptcy attorney to understand which debts are dischargeable and which are not.

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Also, an adversary complaint can be filed by any creditor to fight the discharge for limited grounds on any debt.  See us to discuss what can't be discharged.

The Automatic Stay and the Trustee

If you file for Chapter 7 bankruptcy, the court will place an automatic stay on your debts. This means that your creditors cannot contact you or take any action to collect your debts. The court will also appoint a trustee to oversee your case. The trustee will sell any of your nonexempt assets and use the proceeds to pay your creditors. However, certain assets may be exempt under state law, meaning you can keep them.

The Discharge and Starting Fresh

After your Chapter 7 bankruptcy is discharged, you will be able to start fresh with a clean slate. Your debts will be discharged, and you will no longer be responsible for repaying them. However, there are some debts that are not dischargeable in bankruptcy, such as student loans, child support, and alimony. Additionally, filing for Chapter 7 bankruptcy will have a negative impact on your credit score. However, your credit score will start to recover after your bankruptcy is discharged.

Pros and Cons of Chapter 7 Bankruptcy

Like any financial decision, there are pros and cons to filing for Chapter 7 bankruptcy. On the one hand, Chapter 7 bankruptcy can discharge most unsecured debts, stop creditors from collecting debts, and provide a fresh start. On the other hand, it can have a negative, but usually small, impact on your credit score, result in the loss of some assets if you are well past the exemptions, and it can be a complex process.  For most people, you will see that bankruptcy was an overall positive experience not only for you financially, but for the quality of your life overall.

Is Chapter 7 Bankruptcy Right for You?

If you are struggling with overwhelming debt, Chapter 7 bankruptcy can be a helpful tool to get your finances back on track. However, it is important to understand that it is a major decision that should not be taken lightly. If you are considering filing for Chapter 7 bankruptcy, you should talk to an attorney to discuss your options and whether it is the right decision for you. Additionally, it is important to weigh the pros and cons carefully and understand the impact it will have on your financial situation. With the right guidance and information, Chapter 7 bankruptcy can provide a fresh start and a path to financial stability.

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Make sure you have the right Chicago bankruptcy attorney.  We are not a bankruptcy "factory" or a national bankruptcy law firm franchise.  We are not a law firm that practices in tens of arenas of the law and masters none.  We focus on bankruptcy and as a result, our experience provides solid attorney representation for you throughout Chicago Illinois and the suburban Illinois area.

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It's important that you have an experienced bankruptcy attorney review your specific situation.  Every situation is different and your is specific to you.  Review the Illinois Chapter 7 FAQ's which will answer many questions you may have or may get you thinking about questions your should ask.

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