Which Chapter of Bankruptcy Do You File?

Which Chapter of Bankruptcy Do You File?

There are two categories, or ‘Chapters’ of Bankruptcy that most consumers file — Chapter 7 and Chapter 13.

  • Chapter 7 Bankruptcy is also known as Liquidation.  In general, Chapter 7 cases work by comparing your assets to a list of state-allowed exemptions. Anything that is non-exempt could be liquidated by a Chapter 7 Trustee to payoff your creditors. Using the exemptions, Chapter 7 bankruptcy allows debtors to keep their house, cars, other assets and investments so long as the equity does not exceed the allowable exemptions. There are important income limitations that control who can file a Chapter 7.  The means test determines whether you make ‘too much’ to file Chapter 7 bankruptcy.  Corporations can file Chapter 7, but doing so will likely result in the corporation being taken over by the trustee (and the end of the corporation).  One can only file Chapter 7 bankruptcy once every eight years.
  • Chapter 13 Bankruptcy is also known as Debt Reorganization. The means test determines whether you are a Chapter 13 debtor, your Chapter 13 plan payment, and how long your plan will be.  But the result of the means test is not the only consideration in deciding whether to file Chapter 7 or 13.  In general, Chapter 13 cases work by looking at your assets, liabilities, and ability to pay a plan over a period of years. Determining your ability to pay and developing the plan are the most critical part of your petition.  This is because these numbers determine your disposable income. Disposable income ultimately dictates how much your creditors will receive from you. You must have a regular source of income to fund a plan. As is true in a Chapter 7, Chapter 13 debtors can keep exempt assets. If there are non-exempt assets, creditors will be compensated for the value of these assets through the plan.  There are important debt limitations that apply to Chapter 13 cases.  Corporations cannot file Chapter 13 bankruptcy.