Chapter 7 Bankruptcy
The 2005 Federal Bankruptcy Law changed the way in which a person is eligible to file for Chapter 7 bankruptcy. Chapter 7, the most common form of bankruptcy, refers to the ability of the filer to “liquidate” or be relieved of most of their debts. The procedure is designed to help debtors essentially get a “fresh start.”
Under the law, if the debtor’s income does not exceed the state’s median income, then he or she may be eligible to file for Chapter 7. Before filing for bankruptcy, the debtor must complete a credit counseling session from a provider approved by the court. To be discharged from bankruptcy, the debtor must also complete a financial management class. Classes are operated by independent agencies and require additional costs. Listings of accredited credit counselors can be found at the U.S. Trustee’s website, www.usdoj.gov/ust.
The first thing that happens in a Chapter 7 case is the Bankruptcy Court issues an “automatic stay” to creditors, prohibiting them from proceeding with a collection outside of the bankruptcy case, unless the bankruptcy judge approves it. The automatic stay does not affect criminal proceedings.
When the case is filed, the Bankruptcy Court appoints a bankruptcy trustee to review a person’s assets and financial affairs. The trustee has the power to liquidate assets, which exceed the amount of the exemptions the law allows. In most cases, the trustee does not liquidate the assets but instead issues the debtor a bankruptcy discharge, relieving the debtor from liability for most of the unsecured debt.
Liens on a debtor’s property itself are called “secured debts” and can be items such as a mortgage on a home or a lien on a car. A discharge in bankruptcy, by itself, does not set aside liens on property. In some cases, however, the bankruptcy court can set aside or reduce a lien on property.
Additionally, individuals who want to keep the property secured by a lien commonly enter into reaffirmation agreements with the secured creditor. A reaffirmation agreement is a voluntary written agreement to continue to pay a specific secured creditor despite the bankruptcy so that the individual can keep the property involved.
Note: This information was prepared as a public service by the Illinois State Bar Association. Every effort has been made to provide accurate information at the time of publication. For the most current information, please consult your lawyer. If you need a lawyer and do not have one, visit our lawyer referral page.
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