The Difference Between Bankruptcy Types Under Illinois Law

When individuals or businesses in Illinois find themselves overwhelmed by debt, they often consider filing for bankruptcy as a solution. Understanding the different types of bankruptcy available can help you determine the best course of action for your financial situation. Under Illinois law, there are several types of bankruptcy filings, primarily Chapter 7 and Chapter 13, each with its distinct features and implications.

Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," is designed for individuals or businesses that cannot repay their debts. In this type of bankruptcy, a bankruptcy trustee is appointed to liquidate non-exempt assets to pay creditors. This means that while some of your property may be sold to cover debts, many personal items are typically exempt from liquidation. In Illinois, exemptions may include a portion of your home equity, a vehicle, and personal belongings.

The benefits of Chapter 7 bankruptcy include the discharge of most unsecured debts, such as credit card debt and medical bills. This discharge provides individuals with a fresh start, eliminating overwhelming financial burdens. However, not everyone qualifies for Chapter 7; filers must pass a means test based on their income, expenses, and the state median income. If your income is above the median, you may need to seek a different bankruptcy option.

Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as "reorganization bankruptcy," is primarily designed for individuals with a regular income who wish to repay their debts over time. Instead of liquidating assets, Chapter 13 allows borrowers to create a court-approved repayment plan that typically lasts three to five years. During this period, debtors make monthly payments to a bankruptcy trustee, who then disburses the funds to creditors.

This type of bankruptcy is beneficial for those who want to retain their property while repaying debts. It can be an excellent option for individuals facing foreclosure, as it allows them to catch up on missed mortgage payments. However, Chapter 13 bankruptcy requires a stable income and is subject to debt limits, which may restrict eligibility for those with higher debts.

Conclusion
Both Chapter 7 and Chapter 13 bankruptcy have unique advantages and drawbacks, making it essential for individuals to consider their specific financial circumstances before proceeding. Consulting with a qualified bankruptcy attorney in Illinois can help you navigate the complexities of bankruptcy law and choose the option that aligns with your financial goals. By understanding the difference between these bankruptcy types, you can take proactive steps toward regaining control of your finances and securing your future.