Chapter 7 bankruptcy, also known as "liquidation" bankruptcy, is a legal process that allows individuals to eliminate most of their unsecured debts, such as credit card balances, medical bills, and personal loans. In Illinois, those who pass the means test based on income, expenses, and family size may qualify for Chapter 7. The process involves filing a petition, attending a meeting of creditors, and potentially liquidating non-exempt assets to repay a portion of the unsecured debts.
Understanding Chapter 7 Bankruptcy
Definition and Requirements
Chapter 7 bankruptcy is designed to give individuals a fresh financial start by discharging most of their unsecured debts. To qualify for Chapter 7 in Illinois, individuals must pass the means test, which assesses their income, expenses, and family size to determine if their disposable income is low enough. If the income is below the median for their household size in Illinois, they automatically qualify. If the income exceeds the median, they may still qualify if their expenses are high enough to leave little disposable income.
How to File for Chapter 7 Bankruptcy
Before filing, individuals must complete a court-approved credit counseling course to assess their financial situation and explore alternatives to bankruptcy. An attorney then files a bankruptcy petition and related forms with the Illinois bankruptcy court, including detailed information about the client's income, expenses, assets, and debts. Once filed, an automatic stay prohibits most creditors from continuing collection actions. About a month after filing, the individual must attend a meeting of creditors to answer questions under oath about their finances.
Illinois Bankruptcy Exemptions
Illinois law designates certain property as exempt, meaning it cannot be seized and sold by the bankruptcy trustee. Key exemptions include a homestead exemption for equity in a primary residence, a vehicle exemption, personal property exemptions for household items, protection for tax-exempt retirement accounts, and a wildcard exemption that can be applied to any property if the homestead exemption is not used.
Legal Process for Chapter 7 Bankruptcy
1. Initial Consultation: The lawyer assesses the client's financial situation, explains their options, and determines if they qualify for Chapter 7 based on the means test.
2. Pre-filing Preparation: The lawyer guides the client through the required credit counseling course, gathers necessary financial documents, and prepares the bankruptcy petition and related forms.
3. Filing the Petition: The lawyer files the bankruptcy petition with the Illinois bankruptcy court, which initiates the automatic stay, protecting the client from most collection actions.
4. Meeting of Creditors: The lawyer prepares the client for and attends the meeting of creditors, where the client answers questions under oath from the bankruptcy trustee and any attending creditors.
5. Non-exempt Property Liquidation: If the client has any non-exempt assets, the lawyer works with the bankruptcy trustee to ensure proper liquidation and distribution of funds to unsecured creditors.
6. Debt Discharge: The lawyer ensures that the court grants a discharge order eliminating the client's liability for discharged debts, typically 60-90 days after the meeting of creditors.
7. Post-discharge Follow-up: The lawyer advises the client on rebuilding credit and provides guidance on any post-discharge issues that may arise, such as dealing with nondischargeable debts or credit reporting errors.
