The Differences and Basics of Each Chapter
When bankruptcy becomes an option to deal with financial struggles, you’ll have to gain some knowledge as to what you can keep and what you must release in each bankruptcy chapter. This knowledge will help you make an informed decision and prepares you for the implications of either chapter.
Chapter 7: Liquidation Bankruptcy
Under a Chapter 7 (also known as the liquidation bankruptcy) you release most of your unsecured debts by liquidating non-exempt assets.
Here’s what that means:
- Assets at risk: Non-exempt assets include things like a second home, stocks, bonds, and other investments. Other luxury goods such as expensive artwork and high-end watches are also at risk of being liquidated.
- Protected assets: Most states allow you to keep essential items like your primary residence, basic household furnishings, and a personal vehicle up to a certain value which is set differently by the state you live in. Be aware that some states have unique exemption laws that protect items like work tools and public benefits.
Chapter 7 is also known as the fresh start bankruptcy but requires giving up a considerable number of valuable assets.
Chapter 11: Reorganization Bankruptcy
Chapter 11 is primarily used by businesses and also offers options for individuals. It allows entities to restructure debts while still being able to operate their business without shutting down.
- Business continuity: Chapter 11 enables businesses to retain assets and continue operations. This chapter may also provide a way to renegotiate leases and contracts to reduce expenses.
- Debt repayment plan: With the help of an attorney, debtors propose a repayment plan to creditors that details how each debt will be handled. Bear in mind that the plan must be fair to all the creditors and is subject to court approval.
Chapter 11 is rather complex, but it allows for greater control over assets and overall debt management.
Chapter 13: Wage Earner’s Plan
Chapter 13 bankruptcy is suited for individuals with a regular income and this chapter allows them to keep their assets, but they get to reorganize their debts.
- Asset retention: You get to keep all your assets, including non-exempt items. This can include items that might otherwise be sold in a Chapter 7 case, such as a second vehicle or cherished family heirlooms.
- Repayment strategy: You commit to a court-approved repayment plan that typically lasts up to three to five years. It’s important to be aware that the repayment amount will be based on your disposable income after calculating your necessary living expenses.
Chapter 13 is generally ideal for those who can afford a structured repayment plan and want to avoid asset liquidation.
Asset Management Across the Chapters
Each bankruptcy chapter has distinct its own distinct approach to managing your assets.
The following comparison will help you understand which assets you’ll likely be able to retain or release in your bankruptcy filing.
Retained Assets Across Each Chapter
While each chapter offers different levels of asset protection, the following are the commonalities:
- Primary residence: The primary residence is usually protected across all bankruptcy chapters. The exact amount of equity protected will significantly vary by each state, but in Chapter 13 in particular, you have to consider that it can offer a way to prevent foreclosure on your primary residence by allowing the arrears to be paid over the life of the repayment plan.
- Personal vehicle: Generally retained across all chapters but up to a certain value. The value protection cap also varies by state and affects whether your vehicle can be fully exempt or not.
- Household goods: In all chapters, basic necessities are usually exempt from liquidation. Be aware that specific lists of these exempt items are also clearly defined by state law.
Released Assets Across the Chapters
The type of assets you can lose also varies:
- Luxury items: High-end electronics, jewelry, and other luxury items are typically liquidated in a Chapter 7 bankruptcy. Take note that the definition of what constitutes a ‘luxury item’ varies by jurisdiction
- Non-essential real estate: Secondary properties are often sold off in a Chapter 7 and can also be liquidated in a Chapter 11. If these properties generate income, they might also be retained under a reorganization plan in Chapter 11.
Once you understand these particular distinctions, you become better prepared for the potential outcomes of filing one of the chapters. After consultations with your attorney, they will advise you on the best route to take.
Making The Decision on Which Chapter
Choosing the right bankruptcy chapter is key to your financial recovery. Because each chapter offers different protections and obligations, you will need to consider your short and long-term financial goals, current assets, and what you’re willing to let go of before deciding.
Seek Professional Advice
It’s not wise to take a shot at bankruptcy alone. It’s much better to consult with a bankruptcy attorney because they will provide you with tailored advice based on your specific financial situation and makes every attempt possible to align with your financial recovery goals.
Plan for the Future
Regardless of the chapter you file, you must plan for life after bankruptcy. You will have to establish a budget, take actions to rebuild your credit, and set financial goals for yourself so you can create a stable financial future for yourself and/or family.
Remember, contrary to popular belief, bankruptcy is not the end of the road – it’s a new beginning to regaining your financial stability.
Next Steps
Now that you have a basic understanding of what you keep verses what you let go of in each chapter of bankruptcy, take note of your current assets, and consider consulting with a bankruptcy lawyer to guide your final decision.
This will be a positive start to your journey towards financial recovery and your future self will thank you.
