What Is Bankruptcy?

It can be extremely difficult for people that have been struggling with debt and overdue bills to come to the realization that they may be in a financial situation that won’t simply fix itself.  Although such a situation can seem almost hopeless, there is a solution that the law provides to help people get out from under the burden of overwhelming debt.  In my Chicago bankruptcy practice, I help people to determine whether the decision to file for bankruptcy is right for their individual situations.

Many people believe that changes to the bankruptcy law that were passed in 2005 have made it virtually impossible for individuals to qualify for debt relief through bankruptcy.  While the 2005 law, the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA, has made it more complicated, the reality is that most people who need to file for bankruptcy can still do so.

So what exactly is bankruptcy?  Basically, bankruptcy is a legal proceeding that allows people with more debt than they can repay to start over – financially speaking.  This is why bankruptcy is often referred to as a “fresh financial start.”  Once you file for bankruptcy, creditors must immediately stop trying to collecting the debts that you owe.  Depending on what bankruptcy chapter a person files under, nearly all unsecured debts can be discharged – which eliminates the legal obligation to repay them.  Unsecured debts are those with no collateral, such as credit cards.  Secured debts, such as car loans and home mortgages, must still be repaid if the debtor wants to keep the property.  But if they are behind on payments, filing for bankruptcy can stop a repossession or foreclosure by allowing the past due amount to be repaid over time while the regular payments continue.

While there are various local rules and state laws that come into play in bankruptcy proceedings, the primary source of bankruptcy law is Title 11 of the U.S. Code.  Because bankruptcy is federal law, bankruptcy cases are filed in the federal court for the district in which the debtor resides.  For example, because I am a Chicago bankruptcy lawyer serving Chicago area residents, my clients’ cases are filed in the United States Bankruptcy Court for the Northern District of Illinois.

There are four different types of bankruptcy cases under Title 11:  Chapter 7, Chapter 11, Chapter 12, and Chapter 13.  Of these four, Chapter 7 and Chapter 13 are the most common and most helpful to individuals.  Chapter 7 is called straight bankruptcy or a liquidation and requires individuals to give up property to repay their creditors.  Because of the various state and federal exemptions that protect certain property from liquidation, most people who file for Chapter 7 bankruptcy don’t lose any property at all.

Chapter 13 is also known as a reorganization.  Chapter 13 allows people to repay all or some portion of their debts over time using future income.  No property is liquidated under a Chapter 13.

While this overview provides a basic overview, it is not legal advice.  Bankruptcy law can be complex and people considering bankruptcy should consult with an attorney in their jurisdiction.  If you live in Cook County, Illinois and are seeking a Chicago Bankruptcy Attorney, give me a call or contact me online to schedule your free consultation today