Choosing between Chapter 7 and Chapter 13 bankruptcy: liquidation and exemptions

September 25, 2017by Elizabeth Rosar Chermack

Most people who come into my office with questions about bankruptcy and resolving their debts are familiar (on some level) with Chapter 7 bankruptcy. For most people who are considering filing bankruptcy, a Chapter 7 bankruptcy is the goal.

A Chapter 7 bankruptcy is sometimes called a “liquidation bankruptcy” but the reality is that generally people do not have things with a whole lot of value to liquidate.

When you file bankruptcy, everything that you own is “frozen” and becomes part of the bankruptcy estate. In theory, everything in the bankruptcy estate is sold and then the funds from the sale are divided up amongst your creditors. In reality, if everyone who filed bankruptcy lost EVERYTHING, there would be a lot of issues. For example, people who filed bankruptcy:

  • wouldn’t have vehicles to get to/from work;
  • wouldn’t have clothing (it’s hard to keep a job and function in society if you don’t have clothes); and
  • might not have a place to live.

Luckily, the bankruptcy code (and Minnesota law) protects people who file bankruptcy by allowing them to exempt certain things from the bankruptcy estate. When things are exempted from the bankruptcy estate, it means that you ultimately get to keep those assets.

As I stated above, for most people who are looking at filing bankruptcy, a Chapter 7 bankruptcy is the goal. Why is that?

  • It’s faster than a Chapter 13 bankruptcy; once a Chapter 7 case is filed – as long as everything goes smoothly – it is done in about 3 months.
  • Unlike in a Chapter 13 bankruptcy, you do not have to make monthly payments towards your debts.

Why would someone choose to file a Chapter 13 bankruptcy? Here are some of the possible reasons:

  • They couldn’t pass the means test
  • They have nondischargeable debts that they wanted to pay through a Chapter 13 plan
  • They had assets that wouldn’t be exempt in a Chapter 7 bankruptcy
  • They aren’t eligible for a Chapter 7 discharge at this time due to the date they last filed bankruptcy
  • They’re using the Chapter 13 payment plan to catch up on payments on a secured debt (car loan, mortgage) that they fell behind on

 

Elizabeth Rosar Chermack is a Burnsville Bankruptcy Attorney, and can help you analyze whether Chapter 7 or Chapter 13 bankruptcy is the right choice for you.   Call (952) 491-0390 or send an email to liz@chermacklaw.com to schedule a consultation.

 

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