Bankruptcy 101: What is a Chapter 7 Bankruptcy

Chapter 7 bankruptcy is for people who have very little income and assets: debtors can't pay even a small amount of their debts. Filing a Chapter 7 bankruptcy can help to discharge (or cancel) many of the debts owed by selling one's belongings.

• "Exempt" property that can't be sold may include:
  • Personal property including family pictures, school books, health aids, and necessary clothing;
  • The "wildcard exemption" which allows debtors to protect up to $4,000 worth of their property of their choice, excluding garnished wages. This can include items like bank accounts, tax refunds, furniture, jewelry, collections.
  • A motor vehicle exemption of $2,400. For example, if a debtor owns a car worth $40,000 but owes $39,000 on it, it cannot be taken.
  • Debtors can keep work-related tools worth up to $1,500. These are the tools or equipment people use to earn a living.
  • Life insurance proceeds that are given to a wife or husband or a child, parent, or another person dependent upon the deceased.
  • Social security, earned income tax credit, unemployment compensation, public assistance, veteran’s benefits, disability or illness payments and alimony or support payments reasonably necessary for the support of the debtor and any of the debtor’s dependents.
  • A payment of up to $15,000 for personal injury is exempt.
• Chapter 7 bankruptcy does not cancel these debts: alimony, child support, fraudulent debts, certain taxes, student loans, and certain items charged.

Qualifying for a Chapter 7 Bankruptcy

In Illinois, there are two ways a debtor can qualify for a Chapter 7 bankruptcy after passing an income assessment:

• If the debtor's household income is less than the family median income, they can compute eligibility by using the Illinois bankruptcy means test.
• If the debtor's household income is greater than the Illinois median household income, they may still qualify for deductions because of certain expenses.

The Chapter 7 Bankruptcy Process

1. Debtor files a petition, which temporarily stops creditors from collecting the money owed. This protection is called an "automatic stay."
2. The United States trustee for the district will appoint a trustee to handle the debtor's case and review the debtor's finances.
3. The trustee has the authority to sell any assets that aren't "exempt" or have a lien on them.
4. The money from the sale is then used to pay back creditors (financial institution or individual who is owed money).