Now that you’ve thought long and hard about your financial situation and met with your bankruptcy attorney for an initial consultation, it’s time to go ahead with the bankruptcy filing. The main question at this point is which of the two personal bankruptcy chapters is best for your personal situation.
Which Type of Bankruptcy Is Best for You?
The first step your bankruptcy attorney is likely to take is to determine whether you meet the income eligibility requirements for a Chapter 7 filing. These requirements were put in place with the 2005 amendments to the bankruptcy goal. The goal of Congress was to make it a little more difficult to file for Chapter 7. More individuals filing under Chapter 13 would mean more money repaid to creditors because of the reorganization plan required under Chapter 13.
Illinois Median Income Requirements
In Illinois, the most current figures list the median income for a family of two at $59,794. That increases to $81,570 for a family of four. If your family falls below the median income figure you automatically qualify for a Chapter 7 bankruptcy. If your income is greater than the median figure, that doesn’t mean you still can’t qualify for Chapter 7.
Means Test
There is a second step to the income eligibility determination that is quite complex. A “means test” can determine if you have enough disposable monthly income to make regular payments to creditors. If so, then you must file for a Chapter 13 reorganization plan. However, if you have large debts, it’s possible you can still qualify for Chapter 7.
Your bankruptcy attorney will need information about income and expenses from the past six months. Some of the expenses allowed in the means tests are based on IRS guidelines, instead of your actual expenses. In the end, there is a formula to determine if what is left over each month qualifies for Chapter 7 or Chapter 13.
Is it worth the time and trouble to potentially go through the complicated means test to try to qualify for a Chapter 7 bankruptcy? Most debtors would say yes. Some of the most popular advantages of Chapter 7 include:
A Quick Discharge
It’s possible to get a discharge in a Chapter 7 case as soon as four to six months after the initial filing. In a Chapter 13 case, virtually all reorganization plans are five years long. That means you remain under the control and authority of the bankruptcy court for 60 months. You aren’t allowed in Chapter 13 to make any significant financial decision, such as a car loan, without special approval from the bankruptcy judge.
Discharge Most Debts
It’s possible to get virtually all unsecured debts, which include credit cards and some loans, wiped away in a Chapter 7 case. Your creditors can challenge the discharge of their debt. In most cases, however, unless fraud on your part can be proven, your bankruptcy attorney will be able to fend off the challenge.
Keep Your Property
As long as you don’t have a significant amount of equity in a home or other property – and if you did, it’s likely you would have used that equity for a loan – it’s common not to lose any property in a Chapter 7 case. In fact, it’s been estimated that up to 9 out of 10 cases under Chapter 7 fall into the no-asset category.
State Exemptions
The reason that there are so many Chapter 7 filings in Illinois, Missouri and elsewhere are no asset cases is due to available bankruptcy exemptions. All states rely either on their own exemptions or federal exemptions to protect a debtor’s property.
For example, $15,000 in equity for your home is protected by an Illinois exemption. In addition, there is an exemption of $2,400 for one vehicle and general exemptions on virtually all household goods. Your bankruptcy attorney will explain that the trustee isn’t interested in any seizing any property unless it’s worth the trouble.
For example, if you own a car that’s worth $3,000, the exemption for a motor vehicle lowers that amount to $600 that’s available to the trustee. Considering the cost of seizing and selling the vehicle, a bankruptcy trustee would most likely uninterested in the car.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.
