Will it be Chapter 7 v. 13?
After you’ve made the decision to get a fresh start, you need to choose a bankruptcy chapter, usually Chapter 7 or Chapter 13.
See here for a look at other factors that drive your choice.
Start with exemptions
Exemptions are the laws that protects certain assets (or really, the value in the asset) from your creditors. It’s the stuff you walk out of bankruptcy with to enable your fresh start.
Since you keep all of your assets in Chapter 13, exempt and non exempt, exemptions in 13 are calculated to figure what you pay to your creditors over the life of your plan.
It’s black letter law that if an asset is worth less than any secured debt plus allowed exemption, it leaves the bankruptcy estate and is once again yours.
What happens to the house
Chapter 7: the bankruptcy trustee has legal control of your house when you file. ( He doesn’t change the locks or invite himself to spend the weekend.) What he does with that control depends on the sale value of the house; the debt, including arrears and judgments, secured by the house; and the exemption available to you.
The trustee’s job is to see if he can sell assets, pay the costs of that sale, and have money to distribute to creditors. If there is no value that isn’t exempt, the trustee will abandon the house back to you. The secret exemption.
Chapter 13: A central premise of Chapter 13 is that you stay in control of your property. You can choose whether to surrender the house; sell it in Chapter 13; or cure any arrearages through your plan. The longer length of Chapter 13 allows for the continued availability of the bankruptcy judge to adjudicate disputes with your mortgage servicer. In Chapter 7, the bankruptcy system has little stake in correcting any mistakes by your servicer.
In both chapters: A debtor can wipe out any judgment liens that eat into an available exemption. The automatic stay stops foreclosure until the end of the case, or until the judge gives the lender the OK to foreclose. Only Chapter 13 can wipe out tax liens.
What about my wheels
Chapter 7: Debtors have an option to redeem a vehicle and eliminate the car loan if they can pay the lender the current value of the car. Payment generally must be made in a single payment. This is powerful if the car is worth less than the car loan.
If there is value in the car above the loan payoff and any exemption, a Chapter 7 trustee may seek to sell the car. You could be the buyer, if you can swing the price.
Chapter 13: Your plan can spread the remaining loan balance on a vehicle over the life of the plan, reducing the monthly cost of the car. If you have a high interest car loan, the interest rate can be reduced to today’s interest rate. And in many circuits, you can eliminate that part of the loan that represents an underwater tradein or insurance/maintenance contracts added to the loan when you bought the car.
The ability to strip the loan down to today’s value of the vehicle is limited to purchases
- more than 910 days before you filed or
- vehicles bought for business or
- vehicles bought for others.
Sole proprietorship business
Chapter 7: If your business is a sole proprietorship or a partnership, that business is likely to be closed immediately by the Chapter 7 trustee. The trustee is worried that he will have liability if something goes wrong in the business or if the business runs up more debts. Sometimes, you can move for an emergency order abandoning the business if it has no real saleable value and stay open.
Generally, businesses operated as corporations or limited liability companies are unaffected by the shareholder’s bankruptcy. The shares of stock in the business pass to the trustee, but not day to day control of the business.
Chapter 13: Thirteen expressly allows the operation of a business during the plan, even a proprietorship. No risk of closure, no interference with operations.
Chapter 7: Retirement arrangements like pensions and 401(k)’s are not property of the estate. They aren’t available to pay creditors by federal law. IRA’s are property of the estate but enjoy a million dollar plus exemption that is available in every state. Social Security is safe from creditors as well.
Chapter 13: The same protections for retirement assets operate in Chapter 13.
Making the Chapter 7 v. 13 decision
The choice of Chapter 7 v. 13 is about more than just what happens to your assets. It has to do with your goals, the kind of discharge you need, and your ability to fund a Chapter 13 plan. But by understanding how different bankruptcy options treat your stuff, you’re off to a good start.