How the Value of Non Exempt Assets Will Determine Which Bankruptcy You File

Whether you file a Chapter 7 (liquidation) or Chapter 13 (debt reorganization) bankruptcy depends on the value of your non-exempt assets.

Chapter 7 vs. Chapter 13: An Overview

Chapter 7 is called "liquidation" bankruptcy: the debtor's assets--his or her property, including real estate, vehicles, personal property, investments, and cash--are "liquidated," or collected and sold (unless it's already cash). The proceeds of the liquidation are distributed to creditors; after they get as much as they're going to get from the debtor's assets, any remaining debts are discharged, or eliminated.

(There are a few more wrinkles, such as for property acting as collateral for secured debts; however, for this discussion, we're going to gloss over that.)

Chapter 13 does not affect a debtor's assets. Instead, a reorganization plan--a court-ordered budget--is developed, under which the debtor will pay creditors as much as he or she can for 3 - 5 years, after which remaining debts are discharged. And by "as much as he or she can," we mean, "AS MUCH as he or she can"; the debtor's entire income, less basic and court approved costs of living (plus amounts needed to pay certain protected obligations, like child support) is devoted to paying creditors.

Exempt Assets: What Are They?

Exempt assets are assets that do not have to be liquidated for creditors.  They are assets the debtor gets to keep, to get a fresh start. States have the right to set their own exemptions, which can either replace or supplement the federal (national) exemptions; however, the federal exemptions will be used for the purposes of this discussion. They can be found at 11 U.S.C. 522, and are very specific: only that property named in the exemptions, and only to the extent defined by law, is protected from liquidation.

Some property or assets are entirely exempt, such as 401(k)s: creditors can't touch them at all. Other property is only exempt up to a certain amount, such as a residence ($15,000) or a motor vehicle ($2,400). When an asset is partially exempt, it can be liquidated, but the debtor gets to keep proceeds up to the exemption amount.

Which Bankruptcy Do You Pick?

Living under a court-ordered budget is very limiting; all things being equal, you'd rather not be under court financial supervision (Chapter 13). However, how much would you give up by declaring Chapter 7 instead? If you're a renter, with a used car and relatively little savings, you might give up little by filing Chapter 7. If instead you own a $600k house with only a $120k mortgage on it ($480k of equity), two new cars, an RV, and have extensive savings, the cost of Chapter 7 would be very high indeed. The amount of non exempt assets --assets which could be liquidated--will often determine which bankruptcy you file.

How an Attorney Can Help

A lawyer can help you understand all the exemptions you might be eligible for, so you can make an informed decision.