For most Americans, there are two applicable chapters in bankruptcy, chapter 7 and chapter 13. The determination of filing either a chapter 7 or chapter 13 is made first, by the consumer’s needs and second, by the amount of assets or amount of income. The “new” bankruptcy laws created a complicated “means test
Reasons for Filing Chapter 13
Aside from the means test calculation, taxes, saving one’s home, and keeping assets are the most common reasons to file chapter 13. Chapter 13 allows a consumer to pay tax liabilities over time without penalties and interest. One can also catch up on mortgage payments in a chapter 13. If a consumer has assets he or she wants to keep, but can’t afford to payoff all the debt, payments can be made to the extent of the value of the assets.
Chapter 13 can be complicated. An attorney should be used to navigate through this bankruptcy.
Chapter 7 is effectively a liquidation. Someone filing under this chapter figuratively comes to the court and says, “here’s all my stuff, here are my debts, and here’s my income. I don’t have any assets to pay my debts and I don’t have enough income to pay off what I owe.”
In both chapter 13 and chapter 7, a trustee is appointed. The chapter 7 trustee is charged with the responsibility of collecting assets, investigating transfers, if any, and scrutinizing financial records to determine the truthfulness of the bankruptcy papers.
Although it is preferable to proceed under chapter 7 because of the quickness of completing the case, it can also be more stressful for the consumer if any potential issues exist.
When determining assets, one filing bankruptcy must list all the assets. Each state has laws that permit “exemptions”. That is, the laws allow consumers to protect assets from the reach of creditors or the trustee. In Florida, where I practice law, consumers have unlimited protection of their home and retirement plans. Unfortunately, the protection of personal property is limited to $1,000 (if own a home) or $4,000 (if don’t own a home) and $1,000 in equity in a car.