Basics of Bankruptcy: Introduction to Chapter 7 and Chapter 13

This series of posts discusses the basics of Chapter 7 and Chapter 13 bankruptcies and why one should be selected over the other.

Why Choose Bankruptcy?

The goal under any chapter of bankruptcy (at least as far as Congress is concerned) is to try and generate funds to distribute to the unsecured creditors and, in exchange for that attempt, the debtor’s debts will be discharged, other than for for several exceptions including, but not limited to:

  • Certain taxes
  • Student loans
  • Domestic support obligations
  • Criminal fines and restitution
  • Personal injury automobile accidents involving drugs or alcohol

The biggest difference between a Chapter 7 and a Chapter 13 is how the funds are collected.

Basics of Chapter 7 Bankruptcy

A Chapter 7 can be thought of as a “liquidation” bankruptcy. The Chapter 7 trustee appointed to the case will value the debtor’s property and determine whether property may be liquidated and funds distributed on a pro rata basis to the unsecured creditors.

Each state allows debtors to keep property necessary for the “fresh start.” The property that may be kept (which is exempt from liquidation) is called an exemption.

The major exemptions in the State of Indiana are as follows:

  1. Retirement (in a qualified retirement account) is fully exempt
  2. Real or personal property constituting the debtor’s primary residence is exempt up to $17,600.00 in equity ($35,200.00 for a married couple)
  3. Personal property valued up to $9,350.00 is exempt ($18,700.00 for a married couple)
  4. Intangible assets up $350.00 are exempt ($700.00 for a married couple).

While the majority of cases are “no asset” cases, the debtors must honestly and fairly list all assets and cooperate with the trustee in liquidation of assets in order to receive a Chapter 7 bankruptcy discharge.

The entire Chapter 7 bankruptcy takes approximately 120 days from start to finish and is a fairly simply way to obtain a fresh start. This article will focus on the Chapter 13 bankruptcy due to its time and complexity.

Our next post will discuss why to file for Chapter 13 bankruptcy vs. Chapter 7, including income levels and personal assets:

Income & Assets: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 1


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*Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.