Chapter 7 is the most common type of bankruptcy. "Chapter 7" refers to a section of the United States Bankruptcy Code, the federal law that governs the process. It is sometimes referred to as the “fresh start” process or a “straight” or “liquidation” bankruptcy. If you or you and your spouse have little property or assets with little value beyond what is owed on them, and you struggle to pay your bills, Chapter 7 may be a process to consider.
In most cases, a Chapter 7 process does not involve the sale of the your assets to pay off your debts. Secured debts like mortgages and car loans can be included in the Chapter 7 and wiped out, but if you intend to keep the house or car, you may need to sign an agreement with your lender called a "reaffirmation" that you won't include them in the bankruptcy.
Generally, for people with a lot of unsecured debt, like credit card bills or medical bills, and few assets, Chapter 7 may be a good option. The benefits of a Chapter 7 bankruptcy can include:
At Modestas Law, we have substantial experience in Illinois with Chapter 7 bankruptcy, as well as other bankruptcy proceedings. If you are considering Chapter 7 bankruptcy, an important first step is understanding more about eligibility for Chapter 7 and the general court process.
To be eligible to file, you or you and your spouse must meet income criteria. Your income must either be lower than the state’s census median income or satisfy a means test, which is a 60-month disposable income-based test. If your income is above the state's median income and the means test is not satisfied, you will have to demonstrate special circumstances to be permitted to file.
In addition, to be eligible to file, you must complete a credit counseling session with a credit counseling agency within the six months preceding the initial filing.
You won’t be eligible to file under Chapter 7 if you filed another Chapter 7 case and received a bankruptcy discharge within the last eight years, or if you could complete a Chapter 13 repayment plan.
The process begins with filing a petition and related forms with the United States Bankruptcy Court. You provide information that includes listing:
Exempt property is the property that you are allowed to keep after a bankruptcy proceeding. In Illinois, state law determines what property is exempt from a Chapter 7 bankruptcy. There are a number of permitted items. The most common are:
In addition, Illinois has a wildcard exemption that allows you to keep up to $4000 of any personal property of your choosing.
Filing the petition puts into effect an automatic stay, which immediately prevents most creditors from trying to collect from you or taking other adverse actions. The automatic stay can:
The automatic stay does not affect some tax proceedings (like IRS audits), support actions, or criminal proceedings.
As soon as you file for Chapter 7 bankruptcy, control of your case is assigned to a bankruptcy trustee appointed by the court, who is responsible for seeing if you have any assets they can sell and then distributing the proceeds to your creditors. In the vast majority of Chapter 7 cases, the trustee does not sell your assets. The bankruptcy trustee will schedule a meeting of creditors, notifying you and all the creditors identified in your court papers. You attend the meeting and may be sworn to answer questions from the trustee. The creditors' meeting is likely the only time you will need to go to court.
Secured debts, like a home or automobile, where the property serves as collateral for the loan, are treated differently from unsecured debt. If you are behind in your payments, the creditor can ask to have the automatic stay lifted and repossess or foreclose on the property. If you are current in your payments and have equity in the property, the trustee can still take the property and sell it unless it is protected by an exemption. Depending on the circumstances, you also may be able to:
Secured creditors may retain rights to seize or foreclose on property securing a debt even after discharge. Depending on the circumstances, you may be able to keep secured property — like a car — and reaffirm the debt. A reaffirmation is an agreement between you and the creditor in which you agree to remain liable and pay all or part of the money owed. In return, the creditor agrees not to repossess the property as long as you stay current in your payments. Reaffirmations must be signed and filed with the court before the bankruptcy discharge is entered.
After the meeting of creditors, at the end of the bankruptcy process, the court issues an order called a bankruptcy discharge, which prevents creditors from collecting on the unsecured debts listed in your bankruptcy case. Creditors can no longer demand payment, report nonpayment, or pursue you in any other way. You no longer have any responsibility for those debts. Exempted debts — like taxes, alimony, and child support — are not discharged. In most Chapter 7 cases, the debtor ends up with most debts being discharged.
The entire Chapter 7 process usually takes about three to four months, but it can take longer in individual circumstances. A Chapter 7 bankruptcy stays on your credit report for up to 10 years from the date of filing. However, this does not mean you cannot start rebuilding your credit immediately after the bankruptcy and obtain credit in less than 10 years. In most cases, debtors can obtain some sort of credit relatively quickly after the completion of their bankruptcy.
Chapter 7 may be an option for a business that cannot pay its creditors. The process for a business is somewhat different from the process for individuals and married couples. The bankruptcy trustee assumes control of the business almost immediately and liquidates the assets to distribute them to creditors. The business does not receive a bankruptcy discharge at the end of the process, but the individual owning the business may receive a discharge. The business debts continue to exist until expiration of the applicable statute of limitations.
Modestas Law serves Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends.
Contact us to schedule your initial free consultation.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.