As an experienced bankruptcy lawyer in Nashville, Tennessee, Ron Nevin says that filing for bankruptcy is about seeking relief from excessive debt, not about whether or not you have any money. Here, Nevin explains the differences between Chapter 7 and Chapter 13 bankruptcies and what you can expect to be left with after you file.
When it comes to bankruptcy, many people associate it with a total lack of money. However, contrary to popular belief, filing for bankruptcy does not necessarily mean that you don’t have any money. Bankruptcy isn’t associated with a complete lack of assets; it’s associated with insolvency, which is an inability to meet your financial obligations.
Basically, two scenarios define bankruptcy according to the law. One is the scenario in which someone’s liabilities exceed his assets. The other is one in which someone is simply unable to pay his debts. If either scenario applies to you, you could qualify to file for bankruptcy.
Bankruptcy itself either relieves you of your debt (as in a Chapter 7 bankruptcy), or allows you to deal with your debt in a different way (as in a Chapter 13 bankruptcy). Whether you qualify for Chapter 7 or Chapter 13 bankruptcy will depend on the amount of your debt, your income (if any), and your potential ability to repay your debts. In neither case will you be completely without money or assets unless, of course, you had no money or assets to begin with.
Filing for Chapter 7 Bankruptcy
When filing for Chapter 7, you will be asking for a portion of your debt to be discharged completely. In exchange, you agree to give up most of the money and assets you have at your disposal. Any assets will likely be sold, and the proceeds distributed to your creditors as partial repayment. You do, however, get to keep a small amount of personal property and possibly your home, which are called “exemptions.”
The amount of personal and real property you are allowed to keep depends on the state in which you live. While some states allow large exemptions, others only allow a few thousand dollars. Because the rules vary so widely from state to state, many people who file for bankruptcy choose to do so in a state that has relatively high exemption amounts.
Most Chapter 7 cases are “no asset” cases. That is, usually no assets are available above the debtor’s exemption amounts. In the few cases where some nonexempt assets are left, those assets will be distributed according to the priorities defined by the bankruptcy code. Domestic support and back taxes are paid first, then credit cards, medical bills and other debts. Most creditors will not receive 100% of what they’re owed. Instead, they will receive only a portion of that amount. The exact distribution will be determined by the court.
Filing for Chapter 13 Bankruptcy
When filing for a Chapter 13, your money and your assets remain largely under your own control. In fact, you can only qualify for Chapter 13 bankruptcy if you have a steady income. A Chapter 13 can result in a discharge of some debts that are not fully paid in the repayment plan. The payment plan is designed to repay your creditors within a specified time frame, up to five years. This is accomplished by consolidating your debts and allowing you to make a single monthly payment.
Sometimes, the payment will come in the form of a payroll deduction. The amount of the payroll deduction will be determined based on your income and the state in which you live. In exchange for being allowed to retain control of your property, you are required to repay your creditors at least as much as the total value of all of your nonexempt personal property.
If you’re considering filing for bankruptcy, an attorney can help you better understand what your financial picture will look like after your bankruptcy. While you certainly won’t be wealthy after a bankruptcy, in most cases, you won’t be completely broke either. Understanding your obligations under each type of bankruptcy and your state’s exemption amounts can help you decide whether bankruptcy is the right choice for you.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
Ron Nevin is a writer for
articles at Yodle Consumer Guide.