Chapter 7 and Chapter 13 of the bankruptcy code have given millions of people the financial freedom they needed to get on with their lives without a crushing debt load. There seems to be a lot of confusion regarding which chapter is right for who, so I’ve written this post as a quick reference for anyone who cares to know.
Chapter 7 is often referred to as a “complete liquidation”, but this is not entirely accurate. The bankruptcy code provides that debtors are able to save certain property according to certain state law exemptions. What this means is that Georgia state law allows you to prevent certain property from being liquidated to pay off yours creditors. The Chapter 7 Trustee is the individual tasked with administering your case and liquidating whatever non-exempt assets you have to pay off your creditors.
The Chapter 7 Trustee makes money by receiving a percentage of whatever value of the property he or she distributes to your creditors, so there is definitely an incentive for him to sell your assets; however, the three things that trustees really looks for are cash or cash equivalents (stocks, gold, etc.), real estate, and luxury cars. Jewelry is often worth much less than you think, and the liquidation value of your household goods, including that sofa you paid five grand for, is virtually nothing. I have had clients making in excess of $200,000 per year able to exempt everything they owned from the reach of the trustee.
Chapter 7 will wipe out any unsecured debt, with the exception of a few non-dischargeable debts such as child support, criminal fines, and debt incurred through fraud, just to name a few. What Chapter 7 cannot do for you is save your home from a foreclosure or your car from repossession. Your car lender and mortgage holder have what is called a “security interest” or “lien” on your property. This means that if you fail to pay them, they can sell your property to recover some of the money you owe. After you file bankruptcy, creditors can no longer collect against you personally for any amount you owe, though the lien that attaches to your house or car will survive bankruptcy. If you file Chapter 7 to stop a foreclosure, the lender will simply ask the court to lift the automatic stay and foreclose on your home a few months down the road.
If you make more than the median income for a family of your size in Georgia, you may not qualify to file a Chapter 7. In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that does “not a damn thing” to protect the consumer. It is very creditor friendly, and one part of this act is the requirement that all consumer debtors pass the “Means Test” in order to file Chapter 7. If you make more than the median income (around $50,000 for a family of two), you presumptively fail the Means Test, though this presumption can be overcome with the help of a bankruptcy attorney who can find the right deductions to help higher income individuals pass the means test.
Chapter 13 is the chapter to file if you want to keep all of your assets without worrying about a trustee attemping to sell them. In a Chapter 13 bankruptcy, you will be given the option to pay back a portion of your debts (based on several factors that go beyond the scope of this article) over a 3-5 year period. One of the biggest advantages to filing a Chapter 13 bankruptcy is the ability to “strip-off” a second mortgage on your property if the first mortgage is worth more than the value of your home. For instance, if your residence is worth $100,000 and you owe $120,000 on your first mortgage, there is no equity, or value, for the second mortgage to attach. As a result, the second mortgage is wiped out and treated the same as any other unsecured debt, such as your credit cards and medical bills.
Just like Chapter 7, most debts are wiped out, though you will receive your discharge at the end of your payment period rather than a few months down the road as in Chapter 7.