In deciding between Chapter 7 and 13, get this question out of the way right away: “Can I keep everything I own if I file a Chapter 7 case?”
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Most people do not lose anything that they own when they file bankruptcy. That’s because the law protects (“exempts”) certain kinds of your assets and usually a certain dollar value of them. If everything you own fits within those kinds and those amounts, then you can file a Chapter 7 “straight bankruptcy” and protect everything. Even if you DO own and want to keep things beyond those limits, filing a Chapter 13 case will likely protect those additional things. So, a way to put the question is whether 1) all your possessions are protected under Chapter 7 or instead 2) you need the extra protection provided by Chapter 13.
(This blog is about things you own free and clear. Those that are collateral on debts, such as your home with its mortgage, are a whole separate discussion for later.)
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This is a good first question once you start seriously considering bankruptcy because usually your attorney will be able to answer it quite quickly and assure your possessions are protected in a Chapter 7 case. And if some are not protected, that’s an issue that should be addressed by your attorney and you from the very beginning.
Just because your attorney can usually make this determination quite quickly does not mean that it is not an important question, or that it’s an easy one for someone who isn’t highly experienced in this area of law.
It’s an important question because:
1) If you’re filing bankruptcy you likely can’t spare to lose what you own, so you don’t want to put any of it at risk.
2) You especially don’t want to lose something unnecessarily, since there usually are ways to prevent that from happening.
It’s not an easy question for the inexperienced because:
1) In some states the state law determines what you can keep, while in some other states federal law does, and in others either state or federal law can apply.
2) After knowing which law applies, the asset categories are often not clearly stated in the statutes, and their meaning can turn on court interpretations or even on the informal practices of the local bankruptcy trustees or judges.
3) The laws change—the statutes, the formal court interpretations, and the informal practices, and it is very difficult to keep up with all this without working with it full time.
4) If you moved from another state, the statutes and court interpretations applicable to your former state may or may not apply.
And if everything you own is NOT protected, then Chapter 13 MAY be a great tool for keeping everything. But here are some good questions to ask your attorney in this situation:
1) Are the substantial extra time and cost of a Chapter 13 case worth this benefit?
2) Can those unprotected assets be more efficiently protected by some appropriate pre-bankruptcy planning?
3) Can those assets be protected in a Chapter 7 bankruptcy by paying a reasonable amount to the bankruptcy trustee—in reasonable monthly payments—while avoiding the extra hassles of a Chapter 13 payment plan?
4) If you would pay such money to the trustee, where would that money go, and might at least some of it go where it would benefit you—such as to pay taxes or some other debt that you would not be written off by the Chapter 7 case and so you would have to pay anyway?
5) And lastly, would Chapter 13 help you in other ways beyond protecting your assets, so that overall it would be worthwhile?