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Chapter 7 and Chapter 13 Bankruptcy – What’s the Difference?

If you are in serious debt and are looking for a way out, two options that bankruptcy attorneys often recommend to clients are filing for Chapter 7 or Chapter 13 bankruptcy. Knowing the differences between a Chapter 7 and a Chapter 13 bankruptcy is imperative because the way in which each operates is significantly different.

Chapter 7 Bankruptcy

A chapter 7 bankruptcy, known as a liquidation bankruptcy, is when most of the debtor’s property is sold in order to pay back creditors. Chapter 7 bankruptcies are usually meant for lower-income individuals who may not have the ability, or assets, required to pay back their debts. In order to determine whether an individual qualifies for Chapter 7 bankruptcy, the individual must meet the income requirement that is set by the state. If an individual does not meet the income requirement then he must complete, and pass, a means test in order to qualify for Chapter 7 bankruptcy.

Although the thought of losing all of your property is frightening, filing for Chapter 7 bankruptcy can have many benefits. First, there are some exemptions in place to help protect the individual’s property. In Illinois, the state set exemptions include:

  • Homestead exemption – equity in property such as homes, condos, etc., up to $15,000
  • Motor vehicle exemption – equity in one motor vehicle up to $2,400
  • Personal property – such as health aides, clothing, etc., up to $15,000
  • Workers compensation – 100 percent exempt
  • Veteran’s benefits – 100 percent exempt

If married couples are filing jointly, each spouse can claim an exemption up to the full amount allowed under Illinois law. That means that married couples can essentially double their exemption amount when filing for Chapter 7 bankruptcy. Further, when a person files for Chapter 7 bankruptcy, an “automatic stay” goes into effect which stops most creditors from pursuing collection efforts against the debtor. This allows the debtor to quickly discharge most debts and have a fresh start. A Chapter 7 bankruptcy is also very short, typically lasting only three to five months.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy, known as a reorganization bankruptcy, is usually for individuals with higher income and more assets.  Chapter 13 bankruptcy allows an individual to keep all of his property by creating a payment plan with the court. During a Chapter 13 bankruptcy, the debtor will pay back all or a portion of his debts within an established time frame—usually within three to five years. Chapter 13 bankruptcy is beneficial because it allows an individual to remain in possession of his property, but only on the condition that he will adhere to the repayment plan. Chapter 13 bankruptcies are usually for individuals with secured assets (such as homes or cars) that are worth more than what the Illinois exemptions cover, so individuals who are looking to quickly get rid of their debt should consider filing for Chapter 7 bankruptcy if possible.

Schedule a Free Consultation

If you are curious about your possible bankruptcy options, exemptions, or anything bankruptcy related, contact the attorneys at Johnston Tomei Lenczycki & Goldberg LLC in Libertyville. Our skilled attorneys will schedule a free consultation with you to discuss all matters concerning your debts. The attorneys at Johnston Tomei Lenczycki & Goldberg LLC regularly practice bankruptcy, specifically Chapter 7 and Chapter 13 bankruptcies, and have many years of experience helping clients eliminate their debt. Don’t let your debts weigh you down; call Johnston Tomei Lenczycki & Goldberg LLC to explore your bankruptcy options today!

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