We always strive to make sure our clients have clear knowledge of all the different chapters of bankruptcy before electing whether to file and which to file. Never would we push our clients into a bankruptcy they don’t wish to be in. There are benefits and drawbacks to both Chapter 7 and Chapter 13. Here’s a brief outline.
Most Chapter 7 debtors walk away with a fresh start about 90 days after their bankruptcy began, coming away with all the same property they brought into it. Nevertheless, a Chapter 7 bankruptcy is often referred to as a “liquidation.” This means that a Chapter 7 is somewhat like a garage sale, at least in theory.
Here’s the way it works: In Chapter 7, you disclose all your property on your bankruptcy petition. We can think of this as pushing your property out onto the lawn for the bankruptcy court to see – figuratively speaking, of course. After disclosing all property, you then claim exemptions, which protect certain property from the bankruptcy court’s powers. Exemptions essentially remove items of property from our hypothetical lawn, moving them into the garage, as it were, where they’re shielded from being sold.
Exemptions generally protect all your basic property, such as homes, cars, clothes, furniture, wedding jewelry, retirement savings, etc. As a matter of fact, in most Chapter 7 cases, there are no “non-exempt assets.” In other words, in most cases, there’s nothing that remains out on our figurative lawn once all qualifying items have been moved to the garage. As a result, the debtor usually walks out of the courtroom with all the same stuff they walked into it with.
Now, in cases where there are nonexempt items – property remaining out on our lawn after all exemptions are claimed – a decision must be made. The court has the power to take whatever unprotected, or “nonexempt,” items of property we have, selling them off to pay creditors some proportion of the balance their owed. Thus, in these cases, where, say, we have oil and gas or mineral interests, or we’re expecting an imminent inheritance, we can either surrender that property in exchange for a Chapter 7 discharge or protect the property in Chapter 13.
A Chapter 13 is an effective way to resolve your debt load, providing certain advantages over Chapter 7. The main advantage of a Chapter 13 is that it provides you a fresh start – a discharge of your prebankruptcy debts – while allowing you to keep non-exempt property.
Unlike a Chapter 7, where the court can sell off non-exempt assets, in a Chapter 13 you keep your non-exempt property, paying out its value over 36-to-60 months before receiving a discharge on the remaining balance you owe. In essence, you buy back your nonexempt property from the court, usually getting all your debt forgiven over and above the value of that property.
So let’s say, for example, you owe $50,000 in credit card debt. You own only your home, your car, clothes, tools, furniture, electronics, and the like. You know that all this stuff is exempt – in a Chapter 7, all of it would be removed from the figurative lawn, shielded in the garage from being sold off. Nevertheless, you do own a vintage Kobe Bryant jersey, worth $10,000. You really want to hold on that jersey. It’s a classic. But you know the court will take it and sell if off in Chapter 7. What do you do?
You file Chapter 13. You’re going to have to pay out the amount of that jersey – $10,000 (plus administrative expense) – in equal monthly installments over the next 36-to-60 months, sure. But by the end of the process, you’ll be rocking that vintage number 8, getting a discharge of $40,000-plus-interest in credit card debt. A pretty good deal, all-in-all.
Thus, generally speaking, a Chapter 13 permits you to keep all your non-exempt property while still availing you of a fresh start from a significant portion of your debt.
Of course, with most of our clients, we first to try to qualify them for a “non-asset Chapter 7,” wherein they walk away with a 90-day fresh start without surrendering any property. But if that is unfeasible, and a Chapter 7 would put assets at risk, Chapter 13 provides a good way to obtain much of the same relief while protecting that property.