What is bankruptcy — and what does it really mean for individuals and households in Chicago and around the country?

These are fairly straightforward questions, with answers that will naturally change, depending on who you’re speaking with. Sometimes, it may feel hard to get a clear understanding of what goes into the bankruptcy process, particularly when you’re trying to get a handle on all of the unique variables for your situation. To make matters more difficult, there are also plenty of myths and misconceptions out there about all things bankruptcy.

As you weigh your options for dealing with severe debt, it’s incredibly important to understand all of your options for relief — and that includes having a firm understanding of bankruptcy: What it means, what it does, and what it can and cannot accomplish for debtors.

What Is Bankruptcy?

To address the first point, and the biggest elephant in the room: In simplest terms, bankruptcy is a legal process that allows consumers and businesses to get rid of their debts and repay their creditors. It is used by corporations, families, and individuals to address severe indebtedness by allowing them to discharge or reorganize their debts, in order to make them more manageable.

There are different types of bankruptcy, which can all allow people to address and, ultimately, discharge their debts in different ways. When it comes to consumer bankruptcy, most debtors need to know about Chapter 7 and Chapter 13, which have different eligibility requirements and different long-term effects for consumers. 

Chapter 7 bankruptcy is sometimes called a “liquidation” bankruptcy. In Chapter 7, the consumer may liquidate some or all of their assets in order to pay down debts, while also having many of their unsecured debts discharged. Chapter 13 is often thought of as  “reorganization” or “restructuring” bankruptcy. In Chapter 13, the debtor works up a repayment plan with the court and their debtors, to help pay off set amounts in a set period of time, usually three to five years. At the end of this process, the debtor may have some of their remaining unsecured debts discharged, freeing them from remaining liability. 

What Is Bankruptcy, Really?

So, that’s what bankruptcy is, on paper. Fairly direct, right? But from there, there are inevitably countless questions that come up. Because while many people know what bankruptcy is, it can be harder to get a handle on what it does, how it works, and what advantages it offers debtors here in Chicagoland. (We break down many of those aspects in our “Bankruptcy FAQ,” available here.)

Part of the reason for this confusion is that there are so many myths and misunderstandings out there about bankruptcy. Bankruptcy is a loaded concept for many, and, as a result, it is a word that has come to have a certain amount of stigma associated with it over the years.

In reality, bankruptcy does not need to be thought of as this looming, abstract, terrifying idea. While no two bankruptcies are ever going to be exactly alike, bankruptcy is often a manageable and accessible course of action — with concrete steps to follow, resources you can turn to, and some clear-cut advantages for consumers and businesses, in many circumstances. 

As All Law points out, seeking out bankruptcy relief can be an effective way for consumers to:

  • Cease or delay foreclosure and repossession, debt collection  lawsuits, and pressure from debt collectors, thanks to the protections afforded by such mechanisms as the automatic stay, as well as state and federal bankruptcy exemptions
  • Eliminate personal liability for many types of debt, through a successful discharge
  • Reorganize debts, which can provide an opportunity to gain some breathing room and make monthly payments more manageable 

Bottom line? Bankruptcy doesn’t need to be thought of as a shameful last resort. Instead, a well-managed bankruptcy filing can present an unparalleled opportunity for a fresh financial start. Indeed, many financial and credit decision-makers see it this way, viewing bankruptcy as far more financially responsible than simply defaulting on debt obligations.

Successfully filing for bankruptcy, then, can clear the way for you to pay certain debts off more effectively, once the burden of other escalating debts has been lifted. It is a way to move forward on surer financial footing, giving you the chance to breathe and head into the future with a much more manageable financial situation.

What Bankruptcy Can and Cannot Do

With all this being said, it is important to understand what bankruptcy can and can’t typically do for individuals, from small business owners to retirees. There are restrictions on the types of debts that can be automatically discharged in bankruptcy, and eligibility requirements for who can qualify for Chapter 7. 

As you consider bankruptcy as a method for financial relief, it’s important to understand which types of debt are dischargeable, and which are not. For consumers, there are often many debts that can be quickly discharged in bankruptcy — such as unsecured credit card debts, medical bills, and others. Unsecured debts can be thought of as those that are based purely on your promise to pay them back, usually with interest, as well as your past credit history.

In contrast, many secured debts — that is, credit based on loans in which you offer specific property as collateral — cannot generally be automatically discharged in bankruptcy.  Secured loans, child support obligations, student loans, and a few others cannot be discharged automatically. However, your remaining debts can often be restructured, making them less of a month-to-month burden in many cases. 

Similarly, it’s key to recognize that bankruptcy will not necessarily be an option for all people. There is a means test required to qualify for Chapter 7 bankruptcy, for instance. For some, proven bankruptcy alternatives — such as loan restructuring or payment plans — may be a more effective solution than filing for bankruptcy, in certain cases. There are many different factors that play into bankruptcy eligibility — median income, allowable expenses, secured vs. unsecured creditors, means testing, and so on. It’s important to talk about your unique situation with an experienced bankruptcy attorney, so you don’t overlook any crucial factors or miss any key details. 

Reaching Out for Help

In many ways, the best way to determine if you qualify for bankruptcy, and what strategies to pursue in bankruptcy, is to consult with an experienced legal professional in your area. 

With an attorney on your side, there is no need to search for all the variables and hope you don’t miss anything important, or else waste your time seeking out costly and ineffective third party remedies. Instead, an attorney can help you pursue the right course of action for your unique financial situation. Legal professionals can offer the force of law to protect you from creditors, all while being held to a high standard by the state and ethics review boards. 

About the Gunderson Law Firm

If you’re looking to get a better understanding of bankruptcy, and whether or may be a practical course of action for you, do not hesitate to get in touch with the Gunderson Law Firm. We can get you actual, straightforward answers for your personal situation, and your first consultation with us costs you nothing.

At the Gunderson Law Firm, we protect our clients’ assets to the full extent allowed by today’s laws throughout the complex bankruptcy process, helping them get the debt relief they not only need, but genuinely deserve. We will take all steps possible to protect you and your assets immediately and throughout the bankruptcy process, while also providing counseling on realistic ways to avoid such serious debt issues in the future.

Whether you are a business owner, a wage earner, retired, or otherwise, we can address your specific situation with strategic plans to help put severe indebtedness behind you, so you can enjoy life again. 

Have any more questions? Curious about any aspect of bankruptcy in Illinois? Do not hesitate to get in touch whenever you’re ready to keep the conversation going.