Filing for bankruptcy protection might be the best option if you’re drowning in debt and have no clear way out. Once you initiate the bankruptcy process, your debtors must cease all collection activity or risk stiff penalties. What that process looks like will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.

Chapter 7 and Chapter 13 refer to the chapters of the U.S. Bankruptcy Code that outline each procedure. Both options are available for individual debtors or married couples, although struggling businesses can also file Chapter 7. Once completed, both processes lead to the discharge of most debts.

However, the similarities end there. Appreciating the differences between the two processes is critical to choosing the correct chapter under which to file your bankruptcy petition.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is sometimes called liquidation bankruptcy because of how your assets are handled. A bankruptcy trustee is appointed to collect certain qualifying assets and convert them to cash. That cash is then distributed to your creditors, and most of your remaining debts are discharged afterward.

You must meet the following eligibility requirements to file for Chapter 7 bankruptcy:

  • You must pass a means test, or your income must be low enough that you can’t afford regular partial payments to your creditors
  • You cannot have filed for Chapter 7 within the previous eight years or Chapter 13 within the last six years
  • If you had a prior bankruptcy petition dismissed, you must wait 181 days before refiling
  • You must not file your Chapter 7 petition for any illegal purpose, such as to defraud your creditors
  • You must complete two credit counseling courses

Not all property in Illinois is subject to discharge. You can usually keep a certain amount of equity in your home and vehicles, household goods, wages, public benefits, and personal property.

It can take 120–180 days from the time you file your bankruptcy petition to complete your case and obtain a formal discharge.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, or “wage earner’s bankruptcy,” is for individuals whose income is too high to qualify for Chapter 7 bankruptcy. Under Chapter 13 bankruptcy, you make regular payments to the bankruptcy trustee, who then distributes these amounts to your creditor according to a court-approved repayment plan.

To qualify for Chapter 13 protection, you must:

  • Earn enough income to afford the payments on your plan
  • Have unsecured and secured debts totaling less than the maximum allowed value, which will be $2,750,000 on June 1, 2024
  • Be up to date on all federal and state income tax filings for the previous four years
  • Not be seeking bankruptcy protection for an illegal or fraudulent purpose
  • Have completed a credit counseling course

A Chapter 13 bankruptcy plan lasts three to five years. Once you’ve made all required payments, you’ll receive a discharge of most or all other debts.

Limitations on Discharge of Debts

The discharge of debts that occurs under Chapter 7 and Chapter 13 bankruptcies isn’t absolute. Certain debts will remain even if you complete the process of filing for Chapter 7 or Chapter 13 bankruptcy. These include:

  • Child support arrears
  • Tax obligations
  • Student loans
  • Certain court judgments

Additionally, any debts you reaffirm during your bankruptcy will also remain after discharge.

A reaffirmed debt is one you agree to continue paying, usually in exchange for keeping any secured property attached to the debt. For example, you might reaffirm a car loan during Chapter 7 bankruptcy so you can keep your vehicle.

Chapter 7 and Chapter 13 Bankruptcies Post-Discharge

Once the court has granted your discharge following either a Chapter 7 or Chapter 13 bankruptcy, those debts affected by the discharge become uncollectible. In other words, you aren’t obligated to pay them, and collectors or creditors who attempt to claim them may be subject to penalties.

Consult an Experienced Illinois Bankruptcy Attorney Today

Deciding which type of bankruptcy to pursue can be complicated, as is filing a formal bankruptcy petition. It’s a good idea to seek the assistance of a knowledgeable bankruptcy attorney who can help advise you on the best course of action.

The Law Offices of Glenn & West, LLC, represents individuals seeking bankruptcy protection in Central Illinois. Our attorneys are available to meet with clients at our offices in Nokomis or Litchfield.

If you’re considering filing for bankruptcy, trust The Law Offices of Glenn & West, LLC, to help you plan your next steps. Contact us today to schedule your free initial consultation.