Chapter 7 Bankruptcy: A Basic Explanation and Guide
People are often bewildered by the various bankruptcy options afforded by the law. Though there are, indeed, multiple chapters, the general rule of thumb is that each type is intended to protect a specific type of debtor. Chapter 9, for example, only refers to municipal insolvency, while Chapter 12 covers fishermen and family farms. The average individual who is seeking the financial protections granted by declaring bankruptcy, however, is most likely to file either a Chapter 7 or Chapter 13 claim. Indeed, 65% of bankruptcy cases filed in the United States by consumers are under Chapter 7.
But what does Chapter 7 involve and how does it differ from Chapter 13? Simply put, under Chapter 7 a trustee liquidates (sells) an individual's non-exempt assets and uses the proceeds to repay that debtor's creditors. In return, some of the debt held by the debtor is forgiven or modified. To protect the individual undergoing bankruptcy, their essential assets are considered exempt from liquidation and may be retained for use throughout the process. These may include items like older vehicles, as people need transportation to be able to work, homes, and trade-related tools. Such items are permitted to be retained by the debtor because the ultimate goal in any bankruptcy is to rehabilitate the financial standing of a member of the community and, without the means to work, such a turnaround is impossible.
Contrary to popular understanding, however, a Chapter 7 claim does not necessarily absolve or modify all of an individual's debts after liquidation. Student loans, alimony, child support, and certain other debts are often left unchanged. Still, a Chapter 7 declaration and rehabilitation can have a major impact on an individual's overall financial situation as it sheds a certain amount of overhead cost and related burdens. Essentially, Chapter 7 allows individuals to retain the assets they need to survive and rebuild their lives while paying off some of the debt owed to their creditors by selling non-essential items.
There are limits to how often a Chapter 7 declaration can be filed, however. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 an individual cannot declare insolvency more than once within an eight year period. They must also undergo counseling from a pre-approved credit counseling agency. The reason for such provisions is to encourage people who have had to file bankruptcy to take advantage of the chances it offers to restructure their lives and remain without dangerous debt throughout what will hopefully be long, productive, and healthy years.
Another provision of BAPCPA is the so-called 'means test'. As the name implies, this test determines whether or not anyone filing for Chapter 7 rehabilitation can actually repay their creditors. If they cannot, their case proceeds in the courts. If such a filer can repay their creditors, though, the Chapter 7 petition is rejected. It may, however, be re-filed under Chapter 13.
Often called a 'Wage Earner Bankruptcy', a Chapter 13 rehabilitation does not involve the liquidation of non-exempt assets or debt forgiveness. A debtor who makes such a declaration, in other words, retains all their property. They must, however, develop a plan whereby they will repay their creditors within five years if their income is greater than the median income of the state they live in and within three years if their earnings are less than this median.
As with all forms of bankruptcy, a person's credit score can be affected by declaring insolvency. This can lead to difficulties acquiring loans in their immediate future. It's for this reason that any individual who is considering bankruptcy should discuss their exact financial situation with a credit counseling agency. If they chose to file for such protection, however, any individual who needs bankruptcy help should feel free to talk to the experienced, knowledgeable attorneys at our practice. Thoroughly familiar with related federal and Illinois laws, they're more than happy to help anyone with their legal needs.