Bankruptcy FAQ:

What is the is the difference between Chapter 7 and Chapter 13 bankruptcy?

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy. In Chapter 7 proceedings, you do not pay anything to unsecured creditors included in your bankruptcy petition unless the court requires a liquidation sale of your nonexempt assets. (Nonexempt assets are those not protected from forced liquidation by either federal or state statutes. If you own assets that are nonexempt, you may be required to liquidate them. The court would then distribute the proceeds from the sale to your unsecured creditors as partial satisfaction of the debts you owe. Any remaining unpaid debt would then be discharged, and you would no longer be held responsible for it. You can receive a discharge of your debts through Chapter 7 only once every six years.

In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection (see below), sell it, and distribute the proceeds to your creditors.

Chapter 13 Bankruptcy

Often known as a "wage-earner's plan," a Chapter 13 bankruptcy does not require liquidation of nonexempt assets to satisfy your creditors. Instead, you pay some or all of your unsecured debt back through the court over a 36- to 60-month period. The percentage of unsecured debt you are required to repay must be at least equal to what your creditors would receive if your nonexempt assets were liquidated as part of a Chapter 7 bankruptcy. If you successfully complete the court-ordered repayment schedule, any unpaid unsecured debt is then discharged.

You lose no property in Chapter 13 bankruptcy, because you fund your repayment plan through your income. In Chapter 7 bankruptcy, you select property you are eligible to keep from a list of state exemptions. Although state exemption laws differ, states typically allow you to keep these types of property in a Chapter 7 bankruptcy:

  • Equity in your home, called a homestead exemption. Under the Bankruptcy Code, you can exempt up to $20,200 of equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home.
  • Insurance. You usually get to keep the cash value of your policies.
  • Retirement plans. Most retirement benefits are protected in bankruptcy.
  • You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry only worth up to $1,000 or so. Most states let you keep a vehicle as long as your equity doesn't exceed several thousand dollars. And many states give you a "wild card" amount of money -- often $1,000 or more -- that you can apply toward any property.
  • Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance, are fully protected.
  • Tools used on your job. You'll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.