Over the past year and a half, people across the country have struggled under a difficult economy that has threatened their livelihoods and their financial futures, resulting in business closures, job loss and crippling debt. For residents of Illinois who have fallen behind on payments since the foreclosure moratorium ended, the threat of foreclosure is real, as the state led the nation in foreclosures in August.
While there are circumstances where letting the family home go into foreclosure may be the best solution, in many situations the best option may be bankruptcy. Many people who have a negative perception about this debt solution do not realize that it is one of many protections afforded Americans who are in need. For Chicago-area homeowners, it can help to first examine bankruptcy and debt consolidation options before planning for the future.
What is straight bankruptcy?
Bankruptcy is a legal procedure that enables a debtor to either repay debts or to obtain debt relief, and is available in situations of personal or business default. The individual or entity seeking bankruptcy files a petition through the United States Bankruptcy Court, and a filing may be for individuals, spouses, or business entities. The two types of bankruptcy available to individuals are Chapter 7 and Chapter 13.
Chapter 7, also called liquidation or straight bankruptcy, is a debt relief solution that absolves the debtor of repayment of unsecured debt such as credit card balances, personal loans and most medical debt. Qualifying for Chapter 7 requires that the filer pass a means test that shows that their monthly household income falls below the state median range.
The individual must first provide an inventory of nonexempt real or personal property as determined by state law, which is then liquidated to pay for as much debt as possible. Some debt is not eligible for discharge, such as child support payments, college loans, or tax debt. It is possible to retain secured debt such as a car loan or mortgage after the signing of a reaffirmation agreement.
What is debt consolidation?
In a Chapter 13 filing, the debtor can hold onto most property by working with creditors to restructure the repayment of loans that allows them to pay off most if not all of most debt within three to five years. A court-appointed trustee will oversee the terms and repayment of debt to creditors.
For those who do not qualify for Chapter 7, Chapter 13 bankruptcy halts creditor harassment and eliminates the threat of wage garnishment, and it provides a realistic option to manage obligations that may include discharging debt that the individual cannot repay due to income source limitations.