Bankruptcy Protection: Relief from Debt
Bankruptcy protection presents an option for people in severe financial distress to receive relief from some or all of their debt. A court proceeding under a federal statute, called the “Bankruptcy Code,” lets consumers take steps necessary to get out from under their debt.
But the Bankruptcy Abuse and Consumer Protection Act, which made significant amendments to the Bankruptcy Code, requires that consumers get credit counseling before they file for bankruptcy. After filing, a financial management class must be completed to help identify and correct what led to the bankruptcy. Most bankruptcy filers have to reorganize debts and pay them back under Chapter 13 rather than the Chapter 7 or liquidation option, which relieved filers from most of debts.
Under Chapter 13, a three to five-year window to pay off all or part of the debt is allowed. Upon filing a Chapter 13 case, the Bankruptcy Court issues an automatic stay against collection efforts by creditors. In general, most property is kept with a plan to repay all or most debts over time under a Chapter 13 filing. During that time, the debtor makes regular payments to a Chapter 13 trustee who, in turn, distributes the money to the debtor’s creditors. To be eligible for Chapter 13, a stable income is required and the debtor must meet certain debt limitations for unsecured and secured debt.
An advantage to Chapter 13 is that, for the debtor, who has adequate equity in his or her home, he or she may keep the home. Another advantage is to the co-signer can be protected if the actual debtor files for Chapter 13.
Certain individuals must file a Chapter 13 case, even if they do not have a home or adequate equity in their home. An experienced attorney will conduct a “means test” to determine eligibility for both Chapter 13 and Chapter 7 protections.
Note: This information was prepared as a public service by the Illinois State Bar Association and is a joint project with the Illinois Press Association. Its purpose is to inform citizens of their legal rights and obligations.
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