Chicago Chapter 7 Bankruptcy

Chapter 7 Bankruptcy Overview – What is it?

Chapter 7 Bankruptcy is sometimes called a "liquidation," "straight bankruptcy," or debt-elimination. It is the most common type of bankruptcy filed, and is what most people think of when they think about bankruptcy. The basic purpose is to provide people with unmanageable debt a clean slate by eliminating all qualifying debts. These qualifying debts are considered "dischargeable," and examples of these types of dischargeable debts are: medical bills, credit cards, most judgments from law suits, deficiencies on repossessed vehicles and foreclosed homes, unsecured personal and payday loans, and most other basic consumer debt. Most people in Chapter 7 keep most of their property (such as a home and car) and wipe out, or discharge, most of their debt within a short period of time. Debt that is not eliminated includes student loans, domestic support obligations, divorce and property settlement obligations, penalties based on fraudulent behavior, government fines, and most tax debt.

The vast majority of debtors filing a Chapter 7 do not pay anything towards their dischargeable unsecured debts, and their debts are completely and permanently eliminated. Credit reports later reflect that those debts were “discharged through bankruptcy.” Debtors keep all their property and eliminate all of their dischargeable debts in about 99% of Chapter 7 cases.

That being said, the liquidation bankruptcy contemplates an orderly, court-supervised process in which the trustee takes a look at the financial picture of the debtor, collects the unprotected assets of the debtor’s estate, liquidates or sells them, and uses the cash proceeds to pay the debtor’s creditors. A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only in this situation, and if he also files a proof of claim with the bankruptcy court. All of this is subject to the debtor’s right to retain certain exempt property, as laid out by state law exemptions, and the rights of any secured creditors to the assets. State law exemptions allow everyone to keep property up to a certain dollar figure. So assets worth less than that dollar figure are exempt and therefore protected from seizure, and cash proceeds from a liquidation that are above that dollar figure are not exempt. For example, in Illinois, if you are a couple filing bankruptcy, then $30,000 of equity in your home, $4,800 of equity in two cars, and $8,000 worth of other property are all protected. Exemptions in most states, including Illinois, are generous enough to protect the property of the average person. Exemptions can get complicated though, so it is best to call a knowledgeable attorney to help you handle a Chapter 7 in order to protect as much of your property as possible. Spalding Law Center can advise you about your assets and strategize your case so that you reach the most successful outcome possible. Sometimes clients come to us after they have already made a poor decision in managing their assets, and our options become more limited. It is always better to speak to us before you make any major financial move.

Since most cases have little or no nonexempt property, an actual liquidation of the debtor’s assets usually does not occur! We call these cases “no-asset cases.” After this determination is made, the debtor goes on to receive his discharge releasing him from personal liability for the dischargeable debts. Debtors generally receive the discharge about 4 months after the petition is filed.

Chapter 7 - Who can file?

In addition to individuals and couples, partnerships, sole proprietorships, and corporations are eligible to file under Chapter 7. There are certain restrictions for individuals to file when they are repeat filers. If you have filed a case before, it is best to speak to us about the nature of your old case to determine your current eligibility.

Chapter 7 business liquidations work very similar to Chapter 7 individual consumer bankruptcies. Much of the company’s assets are sold and the net proceeds are divided among the creditors of the business. The business then ceases to exist after liquidation and distribution. Larger partnerships and corporations often intend to continue to do business, and therefore usually prefer to file under Chapter 11. If you run a failing small business in which you have not built up a lot of name recognition or accumulated lots of business assets, Chapter 7 may be right for you.

Give us a call to discuss your options!

Chapter 7 Bankruptcy Process - What Happens?

The entire bankruptcy process, from start (at filing) to finish (at case closing upon discharge), usually lasts about 4 months. The first step is to gather financial documents and a completion of credit counseling certificate. We advise our clients not to obtain the certificate before meeting with us, because: there are potential timing issues that can cause complications for the case, only select agencies are government approved, and we can help facilitate the process so that it is easier on everyone. We then utilize the financial documents, other information that you may give, and your credit report, to prepare your bankruptcy petition.

Automatic Stay
After we file your petition and initiate the process with the court, you are protected by the automatic stay, which instantly goes into effect. The automatic stay is injunctive relief that prohibits most creditor collection activities. This includes filing or continuing on with a lawsuit, billing for payments, collection calls, suspending a license in some circumstances, and reporting the debt to the credit reporting agencies as unpaid (rather than discharged).

A Meeting of the Creditors, otherwise known as a Trustee Meeting or 341, is held about 4-6 weeks after filing. In almost every case there is just one meeting. The meeting is informal and takes place in an ordinary conference room. Creditors rarely show up to this meeting. The trustee, who is not a judge, but a person appointed by the court to oversee the case, reviews the petition with you and us, confirming the information that we included in the petition. He asks routine questions about particular items on the petition, with a particular emphasis on your assets and income. Most meetings last under 10 minutes. It is natural for many debtors filing to be afraid or anxious before the meeting. As our client, there is no reason for you to be afraid, as long as you have been honest and forthright with us. We have the experience to know what red flags will set off a trustee, and to advise you ahead of time if we see potential problems. The trustee is on the hunt for people who are hiding assets or trying to defraud the system. He has no desire to harass or scare the common person. We prepare our bankruptcy petitions in such a thorough and precise fashion, that the trustees usually have virtually no additional questions to ask our clients beyond the routine core interchange. Most of our clients tell us after the meeting, “That’s it? That was easy.” After the meeting, usually the only thing left for you to do is to keep your address current with the court, and to wait for the discharge to come in the mail about 2-3 months later. Some people choose to selectively pay back certain debts, such as those to family members, but that is of course not legally required. We at Spalding Law Center provide guidance and support every step of the way. If you are considering a Chapter 7 bankruptcy, Please give us a call today.