For the vast majority of individuals and couples considering bankruptcy, the choice is between filing a Chapter 7 or 13 petition. Chapter 7 bankruptcy means liquidation, and Chapter 13 bankruptcy means restructuring. But what does it mean to liquidate or restructure your debts?
When a court liquidates someone's debts, those obligations are considered settled. The credit agencies can put the Chapter 7 bankruptcy on the petitioner's record, but the creditors can't ever pursue the debts again.
Notably, the court has a duty to protect the interests of the creditors as much as possible. To accomplish this goal, the court usually appoints a trustee to sell the petitioner's assets. The trustee will then equitably split the proceeds among the creditors.
At the same time, though, a Chapter 7 attorney can ask the court to exempt some of the petitioner's assets. Practical items like your vehicle to get to work, clothes, furniture, and dishes are usually exempt. Your state may permit additional exemptions beyond the federal ones, but ask a Chapter 7 bankruptcy lawyer what the rules are where you live.
A Chapter 13 attorney can help you ask the court to restructure your debts. In this scenario, your Chapter 13 bankruptcy attorney tells the court you can pay part of what you owe if the judge is willing to reduce the amount. You will also submit a plan explaining how you intend to accomplish this. The judge will assess your financial situation and determine if you are eligible and have the means to complete the plan.
Restructuring tends to be the more complex of the two processes. The court may have questions, and it's best to hire a Chapter 13 bankruptcy lawyer to help you answer them.
Oftentimes, your financial situation will do the choosing for you. If a person doesn't have the income necessary to pull off a Chapter 13 bankruptcy plan, for example, they would save time and money by going straight to Chapter 7.
Secured and unsecured debts will also inform your choice. A debt is secured if there is a physical asset attached to it. A home mortgage or car loan would be secured because the creditor can repossess the asset. Conversely, credit card and utility bills aren't secured. The credit card company can't take back the coffee you drank yesterday, for example.
You can only restructure secured debts in Chapter 13 bankruptcy. In Chapter 7, the creditor simply takes back the asset. If you have no secured debts or non-exempt assets, Chapter 7 may be simpler.