Chapter 7 Overview: Deciding on Which Bankruptcy to File

Series: #5 of 13

As briefly mentioned in our previous article, “Initial Interview: Chapters 7 and 13 Bankruptcies – Deciding Which Chapter to File,” the goal of bankruptcy (regardless of the chapter) is to attempt to get some money for the general unsecured creditors in exchange for certain debts being discharged. The difference between a Chapter 7 and Chapter 13 bankruptcy, then, is how the court finds money.

What is Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy is a “liquidation” in which the debtor truly and honestly lists all assets and allows the court to determine if any assets are valuable enough to sell and help pay down the debt. The Code allows individual states to claim the Federal exemptions enumerated at 11 U.S.C. § 5221 or opt out of the Federal exemptions and take state exemptions. Chapter 13 is commonly described as the “adjustment of debts of an individual with regular income” or a reorganization of one’s finances through a plan approved by the court.

Indiana is an “opt out” state and Indiana residents take exemptions found under state law. The majority of exemptions may be found in the Indiana Code at IC 34-55-10-2(c)2 and are generally broken down into four categories (which increased on March 1, 2010):

  1. Real estate or personal property constituting the personal or family residence of the debtor or a dependent of the debtor, or estates or rights in that real estate or personal property, of not more than $17,600.00. The exemption under this subdivision is individually available to joint debtors concerning property held by them as tenants by the entireties
  2. Other real estate or tangible personal property of $9,350.00
  3. Intangible personal property, including chooses in action, deposit accounts, and cash (but excluding debts owing and income owing), of $350.00
  4. An interest, whether vested or not, that the debtor has in a retirement plan or fund to the extent of contributions, or portions of contributions, that were made to the retirement plan or fund by or on behalf of the debtor or the debtor’s spouse which were not subject to federal income taxation to the debtor at the time of the contribution, or which are made to an individual retirement account in the manner prescribed by Section 408A of the Internal Revenue Code1 of 1986.

Any attorney acting as debtor’s counsel should be fully cognizant of all available exemptions available for debtors.

Further, debtors should be aware whether their case will likely be an asset case or not as soon as it is known, but certainly prior to the filing of the case.

Finally, debtors should be advised that filing of the bankruptcy creates a bankruptcy estate (see 11 U.S.C. § 541 – Property of the Estate1) which includes almost everything, and that they must not dispose of estate property until abandoned by the Chapter 7 trustee. Attorneys should also become familiar with 11 U.S.C. § 523 – Exceptions to discharge1 which details those debts which will not be dischargeable in a Chapter 7 case and advise debtors accordingly.

Not all debtors are eligible for a Chapter 7 bankruptcy and must file a Chapter 13 to receive the Section 362 automatic stay and subsequent discharge.

Chapter 13 is commonly described as the “adjustment of debts of an individual with regular income” or a reorganization of one’s finances through a plan approved by the court.

In addition to not being qualified for Chapter 7 (or other chapters,) there are numerous reasons for a debtor to choose to file Chapter 13. In our next installment, we will begin a closer look at the primary reasons why to file a Chapter 13 rather than a Chapter 7 bankruptcy.

Next: Chapter 13 and Why to File, Part 1 – Disqualification

Sources: (links open in new windows)
1. Cornell University Law School Legal Information Institute
2. State of Indiana Constitution on IN.gov

 

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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.