Last updated: August 2010

A bankruptcy can wipe out most, but not all, of a person's debts. It is a drastic step, which should be taken only when absolutely necessary. There are two kinds of bankruptcy available to individuals: Chapter 7 and Chapter 13.

Chapter 7

The purpose of a Chapter 7 bankruptcy is to discharge (wipe out) most debts and allow the debtor a "fresh start." A person can file a Chapter 7 only once in eight years. The court fees for filing a Chapter 7 are presently $299.00.

The fact that you filed a bankruptcy can stay on your credit history for up to ten years.

Creditors

There are two kinds of creditors in a bankruptcy: secured and unsecured.

• A secured creditor is one who has the right to get his property back if he is not receiving payment for it.

Examples of secured debts include: cars, furniture, major appliances, jewelry and a mortgage on a house.  Even in a bankruptcy, these creditors have a right to the return of their property if they are not getting paid.

• An unsecured creditor is one who has no right to the return of any property, no matter how much is owed.

Examples of unsecured creditors include Visa, Mastercard, medical bills, utility bills, and most (but not all) store charge cards.

Some debts cannot be discharged in a Chapter 7 bankruptcy. These include alimony, child support, certain kinds of taxes, and student loans, unless the student loan imposes an undue financial hardship on you and your dependents. These debts must still be listed on the bankruptcy schedules, but they cannot be wiped out.

A chapter 7 bankruptcy requires a debtor to list not only what he owes, but also what he owns. This is because a debtor can only keep certain things in a Chapter 7. These things are called exemptions. The most common exemptions are the following:

• Up to $15,000 worth of equity in a piece of real estate in which the debtor lives. In a joint bankruptcy, the maximum is $30,000. Equity is the difference between what something is presently worth and what is owed on it.
• Up to $2,400 worth of equity in one motor vehicle. In a joint bankruptcy, the maximum is $4,800.
• Necessary wearing apparel.
• Up to $4,000 worth of personal property of any kind. In a joint bankruptcy, the maximum is $8,000.
• Up to $15,000 recovery for a personal injury. In a joint bankruptcy, the maximum is $30,000.

If a debtor has assets (owns anything) above the exemptions allowed, those assets may be taken, sold, and the money used to pay back the creditors. For a list of Illinois exemptions click here

Chapter 13

Chapter 13 bankruptcy, also known as a Wage Earner's Plan, is also a form of bankruptcy. It is heard by the same judges in the same courtrooms. The court fees for filing a Chapter 13 are presently $274.00.

There are several differences between a Chapter 13 and a Chapter 7. The most important are:

• In a Chapter 13 bankruptcy, the debtor attempts to repay his creditors rather than wipe out his claims with no payment. Generally a secured creditor is entitled to payments totaling 100% of the present value of the secured property. Unsecured creditors may receive 100% of payment, or less, depending upon the debtor's income.
• A debtor can receive a Chapter 13 discharge once every two years.
• Unlike the exemptions allowed to the debtor in a Chapter 7, there are no limits as to what a debtor can keep in a Chapter 13. However, a creditor cannot receive less in a Chapter 13 than he would have received from the sale of the non-exempt assets in a Chapter 7.
• In a Chapter 13, the debtor must propose a payment plan to the court. Payments under this plan are made to the Trustee (who charges 10% of all funds collected as his/her fee). The trustee gives the money to the various creditors. In order to present a plan, the debtor must first show the court that he/she is able to meet his/her monthly living expenses. These expenses include rent, food, clothing, utilities, transportation costs, etc. out of his/her regular monthly income. It does not matter what the source of the income is, as long as it is stable and regular. The debtor must then still have sufficient funds left over to make payments on his/her proposed plan to pay off his/her debts.
• Many debts can be included in a Chapter 13, even some that cannot be discharged in a Chapter 7.  However, many of these debts will have to be paid off at 100% of the amount owed.
• A Chapter 13 plan can be extended for up to 60 months (5 years). A debtor can go into a Chapter 13 as often as necessary. There is no six-year limitation as in a Chapter 7.

List of Illinois Exemptions

Social Security Benefits (Including SSI) 42 USC § 407, 735 ILCS 5/12-1001(g)(1)

Veteran's Benefits 735 ILCS 5/12-1001(g)(2)

Federal Employees' Retirement Benefits 5 USC § 8346

Federal Employees' Workers Compensation Awards 5 USC § 8130

Postal Employees' Retirement Benefits 5 USC § 8346

Postal Employees' Worker's Compensation Awards 5 USC § 8130

Public Aid Benefits 735 ILCS 5/12-1001(g)(1)

Unemployment Compensation Benefits 735 ILCS 5/12-1001(g)(1)

Worker's Compensation Awards 820 ILCS 305/21

Crime Victim's Awards 735 ILCS 5/12-1001(h)(1)

Private Pension or Retirement Benefits 735 ILCS 5/12-1006

Life Insurance Payments 735 ILCS 5/12-1001(f), (h)(3)

Private Disability, Illness, or Unemployment Benefits 735 ILCS 5/12-1001(g)(3)

Maintenance or Child Support Payments 735 ILCS 5/12-1001(g)(4)

Wrongful Death Awards 735 ILCS 5/12-1001(h)(2)

Personal Injury Awards (Up to $7,500.00) 735 ILCS 5/12-1001(h)(4)

Up to $4,000.00 in Personal Property As Chosen By the Defendant, Including Bank Accounts 735 ILCS 5/12-1001(b) 

Up to $2,400 in value in any one motor vehicle 735 ILCS 5/12-1001(c)

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