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    This following information should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Bankruptcy Rules, or to any local rules of practice adopted and disseminated by each bankruptcy court.  The information contained herein may not be considered legal advise and we encourage you to seek legal counsel for evaluation of your specific situation. 


     There are several different types or chapters of bankruptcy depending on the circumstances and the type of debtor. However, most consumers will file either a Chapter 7 "Liquidation" bankruptcy or a Chapter 13 "Reorganization" bankruptcy.

      In a Chapter 7, the debtor seeks to eliminate all unsecured debts such as credit cards, personal loans, repossessions, and medical bills, while at the same time keeping those secured items such as a house or automobile.
Chapter 7

      In the broadest sense, under Chapter 7 bankruptcy, the debtor is in effect offering to surrender any assets of value in exchange for a discharge of debts. However, as a practical matter, a significant number of debtors are found to be without assets. This is because a lot of debtors have outstanding mortgages and loans against their assets, resulting in little or no equity. In addition, debtors are entitled to certain "personal exemptions" which further reduce the value to the bankruptcy court.Chapter 13

      In a Chapter 13, the debtor will repay over time the past due amounts on secured loans such as a mortgage or an automobile. The debtor will also pay some or all of the unsecured debts. The repayment plan in a Chapter 13 typically runs from 3 to 5 years.

Bankruptcy Vocabulary

      In the course of filing a bankruptcy, the individual will be exposed to a whole new vocabulary that requires basic understanding. The following definitions are not strict legal definitions but are intended to provide a basic understanding of the concept: 

Debtor – Refers to the person who owes the debt

Creditor – Refers to the person or company that the debt is owed to

Pre-Petition – The time frame PRIOR to filing the case

Post-Petition – The time frame AFTER filing the case

Automatic Stay – After a case is filed, creditors cannot take actions to collect on a debt that is subject to the bankruptcy. If they have a basis to proceed with collection they must first obtain permission from the bankruptcy court by "modifying the stay". 

Real Property – Refers to real estate such as a house, vacant lot, investment property or any interest therein.

 Personal Property – Refers to all property that is not real property. For example, assets such as bank accounts, furniture, automobiles, and retirements accounts are all considered to be personal property.

 Personal Exemptions – Currently in Illinois, the debtor is allowed to shield a certain value is certain assets from creditors. For example, an individual debtor can "exempt" $15,000.00 from the net proceeds of the sale of a residence. Which means it is exempt from the reach of creditors. There are also several other exemptions which your attorney can explain to you.

Secured Debts – If you borrow money to buy an item it may be a secured debt. A house secures a mortgage. A car secures an auto loan. If the loan is not paid and the creditor has a right to foreclose or repossess the asset, it is a secured debt. If you put up collateral for a loan, it is a secured debt.

Unsecured Debts – Refers to debt that is not collateralized by any assets. This would typically be credit card debt or personal/signature loans.

Priority Unsecured Debts – The code places different types of debts into different categories for purposes of receiving distribution from proceeds. In effect, certain creditors get to move to the front of the line if money is paid out of the bankruptcy estate. Thus, prior unsecured debts are ahead of general unsecured debts. Examples included: alimony, child support, and certain taxes.

Non-dischargeable Debt – Certain debts are of a type that are NOT subject to the bankruptcy discharge. Examples include: student loans, certain taxes, fines, and penalties.

Reaffirmation – The act of filing a bankruptcy results in the termination of certain loan agreements. The act of reaffirming a loan agreement, such as for an automobile loan, has the effect of removing the asset and the debt from the protection of the bankruptcy law. Debtors who wish to keep their car and continue paying for it often sign reaffirmation agreements.

Redemption – On occasion an asset such as a car may be worth much less than the outstanding loan balance, making a reaffirmation impractical. The code allows the debtor to pay the creditor off in a lump sum by paying what the asset is worth rather than what is owed, which often results in substantial savings for the debtor. The problem however, is that most debtors in bankruptcy cannot borrow money to pay off the creditor and they do not have any practical means to take advantage of a redemption. There are certain lenders that specialize in redemption financing provided one can meet the lender’s criteria.

Surrender – The debtor has the option of giving up the secured asset instead of reaffirming or redeeming it. An example would be a second car that isn’t needed or a car that doesn’t run.

341 meeting/Creditors’ Meeting – Every debtor in bankruptcy must participate in a meeting with the trustee and creditors. More often than not, the creditors do not attend the typical consumer creditor meeting. The trustee will examine the debtor under oath about the petition and its contents. The debtor must provide the trustee with photo ID and proof of social security number at the beginning of the meeting. The debtor’s attorney will be present at the meeting but usually doesn’t participate in the proceedings as the examination is for the debtor not the attorney.

Discharge – Refers to the elimination of debt in a bankruptcy. In a typical chapter 7 case, the debtor will receive a discharge about 3 months after filing. A discharge would mean that all unsecured debts, not otherwise objected to, would be wiped out and creditors would not be able to attempt to collect on those debts.

Dismissal - Refers to a case being "thrown out" prior to the granting of a discharge, for
example, if a debtor fails to appear for a creditor’s meeting, the court could dismiss the case.         


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