Bankruptcy FAQ (Chapter 7 and Chapter 13)

What is the difference between Chapter 7 and Chapter 13 bankruptcy? Which one lets me keep my property?

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Answer:

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

In Chapter 7 bankruptcy, you ask the bankruptcy court to discharge most of the debts you owe. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection (see below), sell it, and distribute the proceeds to your creditors. For more information on Chapter 7, see A Chapter 7 Bankruptcy Overview .

In Chapter 13 bankruptcy, you file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The amount you'll have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. For more information about Chapter 13, see An Overview of Chapter 13 Bankruptcy.

You lose no property in Chapter 13 bankruptcy, because you fund your repayment plan through your income. In Chapter 7 bankruptcy, you select property you are eligible to keep from a list of state exemptions. Although state exemption laws differ, states typically allow you to keep these types of property in a Chapter 7 bankruptcy:

  • Equity in your home, called a homestead exemption. Under the Bankruptcy Code, you can exempt up to $22,975 of equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home. (To learn more, see Nolo's article Your Home in Chapter 7 Bankruptcy.)
  • Insurance. You usually get to keep the cash value of your policies.
  • Retirement plans. Most retirement benefits are protected in bankruptcy. (To learn more, see Nolo's article Your Retirement Plan in Bankruptcy.)
  • Personal property. You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry only worth up to $1,000 or so. Most states let you keep a vehicle as long as your equity doesn't exceed several thousand dollars. And many states give you a "wild card" amount of money -- often $1,000 or more -- that you can apply toward any property. (To learn more about what happens to your automobile, see Nolo's article Your Car in Chapter 7 Bankruptcy.)
  • Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance, are fully protected.
  • Tools used on your job. You'll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.

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