The economic downturn has dragged a growing number of consumers into bankruptcy. Some experts predict that the bankruptcy filing rate may rise to even higher levels than before 2005, when the new federal bankruptcy law was enacted that made filing for bankruptcy more complex.

Under the Bankruptcy Abuse and Consumer Protection Act, those who want to file for bankruptcy protection are not relieved of their debts as easily as before. The new law can still provide debtors with a way to be relieved of many, if not most, of their debts. This is especially true for the person filing under Chapter 7, which refers to the ability of the filer to “liquidate” most of their assets, thereby giving them a “fresh start.”

Before filing for Chapter 7 protection, the debtor must show that his or her income does not exceed the state’s median income. In addition, the prospective filer must complete a credit counseling session from a court-approved provider.

Upon filing a Chapter 7 case, you will have a three to five-year window against collection efforts by creditors. The court appoints a trustee to review the person’s assets and financial affairs. Though the trustee has the power to liquidate assets, he or she rarely does so but instead issues the debtor a bankruptcy discharge, relieving the debtor from liability for most of the unsecured debt.

More specifically, under Chapter 7, 100 percent of the value of certain types of personal property is “exempt” from liquidation by the trustee such as family photos and qualifying retirement plans and IRAs. Certain other property, however, is only “exempt” from liquidation by the trustee up to a specific dollar amount. For example, a debtor may only keep up to $2,400 of the value of his/her motor vehicle and $15,000 of the value of his/her personal residence.

A discharge in Chapter 7 will not affect some debts such as alimony, child support, fines, certain taxes, etc., or any debts which the debtor failed to disclose to the Bankruptcy Court. To be discharged from Bankruptcy Court, a debtor must complete a financial management class offered by an accredited credit counselor. Classes are operated by independent agencies and require an additional cost.

Note: This information was prepared as a public service by the Illinois State Bar Association and is a joint project with the Illinois Press Association. Its purpose is to inform citizens of their legal rights and obligations.