Personal Bankruptcy

There are two personal bankruptcy procedures that allow people the opportunity to start over financially by eliminating the pressures of existing debt. Under either procedure, creditors are prevented from collecting on unpaid debts by, among other means, garnishing the debtor's wages or attaching the debtor's property. Bankruptcy, however, should be a last resort. Before choosing bankruptcy, you should seriously consider all available alternatives to satisfy your outstanding debts. If you do file for bankruptcy, it may be difficult to obtain credit for the next 10 years.

Chapter 7

In a Chapter 7 bankruptcy, a debtor is required to surrender all of his or her nonexempt property. This property is then sold and used to pay off creditors. If your assets are not sufficient to cover your debts, your creditors may only receive a fraction of what they are owed.

Under Chapter 7, some of your assets are exempt. In Illinois, you are allowed a homestead exemption of $7,500, equity in a car of $1,200, $2,000 in miscellaneous personal property, as well as various other items. If a married couple files jointly, the exemptions are doubled. Thus, a married couple that files for bankruptcy under Chapter 7 may keep $15,000 equity in their home, $2,400 equity in a car, and $4,000 in personal property.

If a debtor has no assets aside from his exemptions, then the debtor loses nothing but his debt when filing under Chapter 7. However, some debts cannot be discharged in a Chapter 7 bankruptcy. These include money owed to the IRS (with certain exceptions), student loans (also with certain exceptions), fraud claims, drunk-driving judgments, alimony, and child support.

Chapter 13

Chapter 13 is the other bankruptcy procedure available to individuals. This procedure is intended for persons who have regular incomes. Under Chapter 13, you are permitted to reorganize your debts without selling off your assets. Under this procedure, a plan for repayment of a portion of your debts is determined and approved by the court. The plan is based upon your future income over the next three to five years.

Usually, debts are paid in full under Chapter 13, but this type of bankruptcy occasionally results in only partial payment. A debtor's repayment plan under Chapter 13 requires that unsecured creditors must be paid no less than they would have received if the debtor had filed under Chapter 7. Therefore, if you have sufficient assets to pay your debts, you will not be permitted to use Chapter 13 to escape full payment. Furthermore, if you have a lot of secured debts, such as a home mortgage and a car loan, and want to keep the security, Chapter 13 bankruptcy will not be beneficial because if you do not pay the secured debts in full the creditors will eventually be able to foreclose or repossess the property. If a debtor defaults on his or her payments under Chapter 13, he or she may be permitted to modify the plan to reduce the payments, or convert to a Chapter 7 bankruptcy.

There are many advantages and disadvantages to filing bankruptcy under both Chapter 7 and Chapter 13, depending on your circumstances. If you are considering bankruptcy, you should seek expert legal advice as to whether it is a viable option for you and which procedure would be most appropriate for your situation.

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