What is Chapter 7 in a Bankruptcy?
This federal debt relief program is not a white flag of surrender. Instead, Chapter 7 in a bankruptcy is a fresh start. Many Americans, especially those with high credit card debt, badly need a financial fresh start. Revolving debt is a treadmill. Since the interest rate is so high, usually above 20 percent, no matter how much you pay, the balance doesn’t change much. Pushing the emergency stop button on a running treadmill is often painful and risky, but it’s usually the only way out.
People who file Chapter 7 on their own or use a bankruptcy petition preparer must bear all that pain and risk alone. A Chicago bankruptcy lawyer cushions the blow. An attorney thoroughly evaluates your case and lays out all your bankruptcy and non-bankruptcy options. Later in the process, if things go sideways, an attorney stands up for you in court. After it’s all over, an attorney also helps former debtors raise their credit scores and maximize their fresh starts.
Qualifying for Chapter 7
Bankruptcy reforms in 2005 made it more difficult to qualify for Chapter 7. Despite these changes, everyone who needs to file Chapter 7 is still eligible. That applies to the formal and informal qualifications.
The formal qualifications include a pre-filing debt counseling class and a post-filing budgeting class. All debtors must take these two classes, which usually take a few minutes and cost a few dollars to complete.
The means test is unique to Chapter 7. These filers must have below-average incomes. The “average” income is normally so high that most people automatically qualify. Alternatively, a Chicago bankruptcy lawyer can use the debtor’s actual monthly income and expenses to qualify. Quite frankly, if the debtor doesn’t qualify using either of these tracks, the debtor probably doesn’t need to file Chapter 7. Other alternatives are available.
The income/expense balance is also at the heart of the informal Chapter 7 qualifications. Usually, if the figure on Schedule I (monthly income) is significantly higher than the figure on Schedule J (monthly expenses), the court often asks unwanted questions about the debtor’s need to file, and motivation to file.
The Legal Process
Once the debtor files, the Automatic Stay and asset exemptions usually take full effect. These two things are two of the biggest benefits of bankruptcy.
Section 362 of the Bankruptcy Code stops foreclosure, wage garnishment, repossession, and most other creditor adverse actions, even if the foreclosure sale is tomorrow or the debtor is seriously behind. Creditors can bypass the Automatic Stay in limited situations. Otherwise, it remains in effect until the judge closes the case.
Illinois has very generous formal bankruptcy exemptions. Once again unless the judge grants special permission, these exemptions apply to:
- Home equity,
- Government benefits,
- Retirement account,
- Motor vehicle, and
- Personal property.
Informal exemptions, such as the best interest of creditors rule, apply in borderline situations. Assume Phil has a small boat with a listed value of $500. Before the trustee sells the boat, the trustee must authorize repairs, store it, and pay all auction fees. These extra costs mean the boat would sell at a loss. Therefore, the law protects it, although it’s non-exempt.
Debt discharge (forgiveness) is the third key benefit of a Chapter 7 bankruptcy. Credit cards and most other unsecured debts are dischargeable in a Chapter 7. The judge usually enters a discharge order about six months after the debtor files paperwork.
Discharge is limited. It erases the legal obligation to repay a debt, but not the collateral consequences of that debt. If a creditor filed a lien before the debtor filed, that lien remains even if the debt is discharged. An attorney must address the lien in a separate proceeding.
Work With a Savvy Cook County Lawyer
No matter what kind of financial problem you are having, there’s usually a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters throughout the Prairie State.