If you cannot afford to pay your debts, bankruptcy offers a legal means for obtaining a financial fresh start by discharging your debts. Bankruptcy cases are governed by federal law and cases are handled by a federal bankruptcy court. Filing a bankruptcy case immediately stops all collections efforts by your creditors including actions to repossess or foreclose on property. In many cases, debtors are not required to pay back unsecured creditors; however, not all bankruptcy cases are the same.
Do I Have to Pay Back Unsecured Creditors in a Chapter 7 Bankruptcy Case?
A Chapter 7 bankruptcy is also known as a “straight bankruptcy” or a liquidation bankruptcy. The reason for this is that in a Chapter 7 bankruptcy case, the trustee assigned to the case reviews the debtor’s assets to determine if any of the assets have equity that is not exempt. If so, the trustee liquidates those assets and he uses the funds to pay back unsecured creditors. However, in almost all Chapter 7 cases filed in central Illinois, the debtor retains all of his or her property because the property is exempt.
In order to qualify to file a Chapter 7 case, the debtor must meet the income requirements of the Means Test. If the debtor passes the Means Test, this indicates that the debtor does not have disposable income, after paying his basic living needs each month, to pay toward his debt. Therefore, the debtor’s unsecured debts are discharged and he does not have to pay back unsecured creditors whose debts are discharged.
Do I have to Pay Back Unsecured Creditors in a Chapter 13 Bankruptcy Case?
In a Chapter 13 bankruptcy, the debtor does pay back unsecured creditors; however, the amount that is paid back is often far less than what the debtor owes. A debtor can choose to file a Chapter 13 case because he wants to protect non-exempt assets; however, most people file a Chapter 13 case because they did not pass the income requirement on the Means Test. In other words, the person had disposable income after paying his living expenses each month to pay toward his unsecured debts.
A Chapter 13 case is referred to as a reorganization because the debtor proposes a bankruptcy plan outlining how he will reorganize his debts into a plan that is manageable based on his income. In almost every Chapter 13 case filed in central Illinois, the debtor does not pay back unsecured creditors 100% of what he owes on each account. Instead, the debtor will pay back unsecured creditors pennies on the dollar depending on his disposable income and other factors. For some debtors, this could be a substantially lower amount than what is owed on the accounts. A bankruptcy lawyer work diligently to reduce the percentage a debtor will pay to unsecured creditors so the bankruptcy plan payment is as low as possible.
Contact Our Office for a Consultation with an Experienced Illinois Bankruptcy Attorney
The bankruptcy lawyers of Pioletti Pioletti & Nichols represent individuals who need help solving their debt problems. We assist clients throughout McLean, Woodford, Tazewell, and Peoria counties by providing compassionate, competent legal services. Contact our office at 309-938-4838 to schedule your free consultation.
When you need the assistance of an experienced bankruptcy attorney in central Illinois, call Pioletti Pioletti & Nichols. We are dedicated to providing our clients with exceptional service and support throughout the bankruptcy process.