CHAPTER 7 – LIQUIDATION
A court-supervised procedure by which a trustee examines the property and disclosures of the debtor to determine the fairness of the case and what should happen during the process. Certain property is deemed as “exempt,” meaning necessary for the debtor to continue after the process. Non-exempt property may need to be abandoned to the trustee or offset with other assets.
You will be able to keep this property after you file for bankruptcy. The exemption amounts are based off of your equity in the property, meaning its fair market value minus any loans for financing that you have on the property. (Value thresholds may vary by state. Check your individual state resource page for its unique statutes.)
- Manufactured Home
- Personal Property (Household Goods)
- Motor Vehicle
- Tools of Trade
- Life Insurance Proceeds, Accident/Disability Proceeds, Pension/Annuity, 401(k), IRA
Public Assistance Based on Need
Not all debtors are automatically eligible to file for Chapter 7 bankruptcy.
If the debtor’s current monthly income is less than the state median, then the debtor automatically qualifies for Chapter 7 bankruptcy. However, if the debtor’s current monthly income is more than that state median, the Bankruptcy Code requires application of a means test to determine whether the Chapter 7 filing is presumptively abusive. If the debtor cannot pass the means test, then the case will generally be converted to Chapter 13 (with the debtor’s consent) or will be dismissed.
CHAPTER 13 – INDIVIDUAL DEBT ADJUSTMENT
This court process is more similar to a payment plan. Over 3 to 5 years, the debtor makes regular payments against his debt. At the end of this process, the remaining debt is discharged like in a Chapter 7. Creditors get more money than they would have gotten anyway. Debtors get the protection of the court process and only make one payment that they can afford.
Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. They must first complete the payments required under the plan. The debtor is also protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. More debts can be eliminated under Chapter 13 than Chapter 7. Debts dischargeable in a Chapter 13 but not in a Chapter 7 include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.