Filing Chapter 7: Good News and Bad News

Weighing the pros and cons of this form of bankruptcy in Illinois

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Bankruptcy is a terrifying prospect for many Illinois residents. But if you are struggling to keep up with your debts and have little or no income, filing for Chapter 7 bankruptcy may be your best option for eliminating your debts and getting a “fresh start,” at least in terms of your finances. But Chapter 7 bankruptcy also carries certain risks you need to be aware of before heading into court.

Why Should I File for Chapter 7?

The main benefit of Chapter 7 bankruptcy is that it can wipe out most, if not all, of your unsecured debts. Once you complete the bankruptcy process, the court grants you a “discharge.” This means your creditors can no longer take legal action to collect the discharged debt. In fact, once you file for bankruptcy, an “automatic stay” takes effect, stopping any pending collection activity against you. Some debts cannot be discharged as a matter of law, including most back taxes and student loans, as well as child support obligations.

Another key benefit of Chapter 7 is that you often get to keep most of your property. Illinois law exempts a certain amount of property from the bankruptcy process, including up to $15,000 in home equity, $2,400 in motor vehicle equity, and 100 percent of any public assistance or unemployment benefits. However, any non-exempt property may be taken by a court-appointed bankruptcy trustee and liquidated to pay your creditors back of some of what you owe.

How Much Does It Cost?

Chapter 7 is traditionally thought to be relatively quick and inexpensive, but bankruptcy attorney David P. Leibowitz says, “it varies considerably. It depends whether you have a simple case or complex case, and you don’t really know that until you look into it carefully.”

The filing fee is $335 and can be paid in installments, but Leibowitz says it’s a lot more complicated than filing your taxes. “Before you can properly advise a person about what kind of chapter to file, you have to find out a lot about that person’s income, assets and types of debt,” he says. “You have to fill it in properly and carefully, and probably need the informed judgment of a lawyer who really understands what’s being asked and why.”

From the time a client comes into Leibowitz’s office—Lakelaw in Chicago—to the time of filing, it’s probably two to four weeks. Then there’s a 30-day period before the creditors meeting. After that, there’s a 60-day period, minimum. Four months is likely the fastest a Chapter 7 can be resolved, “and it can go much longer than that if trustees have questions or concerns,” Leibowitz says.

Why Should I Not File for Chapter 7?

“When you file a Chapter 7, you have to remember that it exposes everything that you have, to be sold or disposed of to a bankruptcy trustee except if the property is exempt. That means you have to make a very careful examination of what you’ve got,” Leibowitz says.

Depending on your current financial situation, you may not be allowed to file for Chapter 7 bankruptcy. Federal law imposes a “means test” on debtors, which basically says you are eligible if your current monthly income is less than the Illinois median income for a household of the same size.

“If you make more than half the people in your neck of the woods for a family of your size and your debts are predominantly consumer debts, you’re presumed to be abusing the system by filing a Chapter 7; you’re supposed to be filing a Chapter 13,” Leibowitz says. Chapter 13 will not immediately discharge your debts, but rather force you to submit a repayment plan to the court that can last up to five years.

“Chapter 7 is typically for someone who makes relatively little income or has relatively little assets, and Chapter 13 is for people that have more income and have assets that might be taken by a trustee,” Leibowitz says. “Another reason why someone might consider a Chapter 13 is if they have debts that might be eliminated in Chapter 13 but can’t under Chapter 7—for example, traffic fines, tolls or property settlement obligations under a divorce.”

Exemptions are often a major deciding point. “You may have a large pension fund or IRA, but those can’t be touched by a Chapter 7 trustee. That you don’t have to worry about. But let’s say you have a house. In Illinois, the exemption for a house is only $15,000, so you’d worry about whether the size of the homestead exemption relative to any equity in the house in making that decision,” he adds.

Another reason you might not want to file a Chapter 7 is if you’re expecting funds in the future such as an inheritance and lawsuit. That would become part of the trustee’s estate, even if it happens after the bankruptcy. The trustee can also claim funds you paid to relatives in the past year. There are also assets you didn’t even knew you had, such as your parents’ home that is listed under your name in the event of their death. “You have to consider not just what you have, but what you did and might in the future,” Leibowitz says.

This is just a brief overview of the relative pros and cons of Chapter 7 bankruptcy. You should contact an experienced Illinois bankruptcy attorney who can answer more specific questions about whether Chapter 7 is right for your financial situation. Leibowitz likens it to filing your taxes; while you can do it yourself, an accountant knows all the deductions you are eligible for and that you might miss. “There are many things that a bankruptcy lawyer can do to help you in a Chapter 7 that you wouldn’t even think about because you weren’t trained to do it yourself.”

Illinois

A Chapter 7 bankruptcy can remain on your credit report for up to 10 years, significantly affecting your ability to obtain new credit.

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