For individuals whose debts are primarily consumer related (i.e., debts related to the purchase of consumer goods and loans, rather than business debts), two forms of bankruptcy relief are available: Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is oftentimes referred to as “liquidation” or “fresh start” bankruptcy. It is referred to as a liquidation because all of a debtor’s “non-exempt” property may be converted to cash by the bankruptcy trustee and those funds paid to the creditors. This does not mean, however, that a debtor under Chapter 7 will lose their property. In fact, in most cases, the case can be filed in such a way that debtors lose no property at all. The law provides “exemptions” for Chapter 7 debtors which allow them to protect a certain amount of equity in property from their creditors. Exemptions exist for a debtor’s primary residence, vehicles, retirement plans, some personal and household property, and several other property interests. Illinois law also provides a “wild card” exemption that is a dollar amount that debtors can use in whole or in part to exempt equity in any property they choose. Any property that has equity which is not fully covered by an exemption is subject to claim by the trustee. If all of the equity in a debtor’s property is exempt, then the debtor will be able to keep all of his/her property.
Note, however, that a Chapter 7 bankruptcy will not permit the debtor to avoid paying a mortgage or a car loan. Those debts must be paid current, and payments must continue to be made, if the debtor wishes to keep the property. If the debtor is behind on payments for a secured debt and wishes to keep the property but cannot get current on the payments, a Chapter 13 bankruptcy may be an option.
A Chapter 13 bankruptcy, often referred to as “wage earners” bankruptcy provides for an adjustment or restructuring of debts of an individual with regular income. It allows a debtor to keep property and pay back debts over time. In a Chapter 13 bankruptcy, a “Plan” is proposed to pay money over a three- to five-year period to the bankruptcy trustee who then distributes the funds to the creditors. Under the Plan, the trustee is required to distribute funds received to pay back any arrearages on secured debts as well as all priority creditors (such as past due income taxes and property taxes) in full as well as an approved percentage of the debtor’s unsecured debts. When all payments have been made and funds distributed according to the terms of the Plan, the trustee will notify the court that the Plan has successfully concluded and the Judge will issue an Order of Discharge, thereby relieving the debtor of any amounts remaining unpaid on unsecured debts.