Chapter 7 Bankruptcy allows individuals to eliminate “unsecured debt” while allowing them to keep their “exempt assets”. This means that by petitioning the bankruptcy court for relief from your debt, you allow the court to review the property that you own to see if it is worth more than what your state law allows you to keep (“exempt assets”).
“Unsecured Debt” is the money that you owe to a person or company which has no collateral. For example, credit cards and medical bills typically are “unsecured debts”.
“Secured Debt” is debt used for financing or buying specific merchandise, big-ticket items, or real estate. The type of ownership that a lender takes in the item is called a “security interest”. Car loans and home loans are good examples of secured debts. Bankruptcy does not eliminate the “security interest” in the item.
So, for example, the company you financed your car through still holds a security interest in the vehicle. Filing bankruptcy does not eliminate the requirement that in order to keep the vehicle you need to make the monthly payments on time.
If you have a home loan or loans, bankruptcy will not eliminate the security interest(s) that the lender(s) has/have in the house. A Chapter 7 Bankruptcy case cannot change the terms of your home loan or mortgage. In some rare situations, only if your mortgage lender agrees, the lender could change some of the payment terms of your loan with the company.
Chapter 7 Bankruptcy does eliminate most “unsecured debt”. Unsecured debt is debt that has no security pledged. Good examples of unsecured debt are credit card debt, payday loans, and medical bills. These debts are generally from your signing of a contract to pay a bill, such as a credit card agreement, or to pay for a service, such as a doctor bill. Bankruptcy, in effect, cancels these contracts.
Chapter 7 Bankruptcy does not eliminate some other unsecured debts such as most taxes, child support or alimony, and student loans or school tuition.
In a Chapter 7 Bankruptcy, you are allowed to keep most, if not all of your property. The amount of and kinds of property you are allowed to keep depends of the law of the state you live in. This is called “Exempt Property”. For example, in Illinois, you are allowed to keep:
- $15,000.00 per person worth of equity in your home. (Equity is the current market value minus the amount you owe in your house);
- $15,000.00 per person worth of an injury claim,
- $4,000.00 per person worth of your personal property (things in your house, for example) (called the “wild –card”);
- $2400.00 worth of equity in a motor vehicle;
- 100% of workers’ compensation benefits, retirement plans, and clothing.