Bankruptcy is a court proceeding that can give individuals and entities much relief from overwhelming financial pressures. Under Illinois bankruptcy laws, bankruptcies can take various forms and can lead to partial or full discharge (a/k/a forgiveness) of debts or to financial restructuring that allows an individual or entity to better pay off its creditors.
Types of Bankruptcies
Six different types of bankruptcies exist. The type that a person or entity chooses depends on their unique circumstances.
Chapter 7 is the most common type of bankruptcy for individuals and involves the liquidation of the debtor’s assets to pay creditors. The debtor is the person who owes money and is filing for bankruptcy. Creditors in Chapter 7 actions are those who hold the debtor’s debt.
It is important to note that under Illinois bankruptcy laws, not all debts are dischargeable through Chapter 7 bankruptcy. Non-dischargeable debt remains after bankruptcy proceedings and may include:
- Student loans in most cases
- Federal, state, and local taxes
- Child support
- Spousal maintenance
- Court fees
- Government-mandated restitution and fines
- Certain condominium debt from dues and fees
- Debt incurred through fraud
- Certain cash advance debts
- Divorce debt
- Debts from illegal or fraudulent activity, such as embezzlement
Certain debts from personal injury and wrongful death damages may also be non-dischargeable.
The main reason an individual would file for Chapter 7 is to completely wipe out all or most of their dischargeable debts for a fresh start. The filing also immediately stops various financial actions that may be taken against a debtor, including foreclosures, repossessions, wage garnishments, and collection agency actions.
Chapter 11 is generally used to reorganize businesses and corporations in a way that makes them better able to service their debt. Some high-net-worth individuals may also take advantage of Chapter 11, but this is not typical. Regardless of who uses this type of bankruptcy, the court and the creditors must approve of the restructuring plan before it goes into effect.
Chapter 12 bankruptcy is for family farmers or family fishermen who bring in a regular income. This chapter allows them to create a repayment plan for their creditors that lasts between three to five years and allows them to remain in possession of their assets.
To qualify for Chapter 12, a married couple must receive more than 50% of their income from the farming or fishing operation. Additionally, at least 50% of the fixed debt must be somehow associated with the farming or fishing operation.
Chapter 13 bankruptcy is another type of bankruptcy popular with individuals. Under this chapter, debtors become subject to a repayment plan that allows them to reasonably service their debt. Hence, the plan is based on the debtor’s current earnings and earning potential for the near future.
The terms of Chapter 13 bankruptcies require debtors to pay their creditors in full if possible. If a debtor cannot service the entire debt, they must pay all of their disposable income to their creditors over the time of the bankruptcy plan, which may be between three and five years.
Disposable income is considered to be any money left over after you pay for your basic life necessities.
To be eligible to file for Chapter 13, you must have less than $419,275 in unsecured debt and less than $1,257,850 in secured debt. Unsecured debt is debt without collateral, such as credit card debt and medical debt. Secured debt is debt backed up by collateral, such as home and car loans.
The reason Chapter 13 is so attractive to some is that it allows debtors to retain their assets instead of having to liquidate them. It also allows individuals who truly want to pay off their debts a way to do so.
Other Types of Bankruptcy
The remaining two types of bankruptcy are Chapter 15 and Chapter 9 bankruptcies. Chapter 9 bankruptcies are reserved for government entities such as school districts, cities, and agencies. Under the chapters’ provisions, they can enter into an approved repayment plan with creditors to service their outstanding debt.
Chapter 15 is a newer type of bankruptcy that is designed primarily to deal with bankruptcy issues involving debtors, claimants, creditors, and assets belonging to more than one country. It is, hence, a lesser-known and utilized form of bankruptcy compared to the others.
We Are Ready to Help
Bankruptcy can be life-changing and should be considered only after consulting with an experienced Illinois bankruptcy lawyer. At the Law Offices of Glenn & West, LLC, we are ready to help you explore your options for getting a grasp on your financial situation and creating a plan for your future.
Contact us at any time for a free consultation — get help understanding Illinois bankruptcy laws from a bankruptcy attorney who cares.