Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Chapter 7 vs. Chapter 13

Dear Dr. Don,
Can you explain the difference between Chapter 7 and Chapter 13, i.e. cars, property and personal items?
Melanie Morass

Dear Melanie,
A Chapter 7 bankruptcy filing has the bankruptcy court constructing a bankruptcy estate from your nonexempt assets. The money, or proceeds, from this estate is used to pay your creditors. The bankruptcy court discharges all eligible debts and you have no further obligation to repay those discharged debts.

What's exempt varies by state. States have the choice of using the federal exemptions or constructing their own lists of exempt assets. This site provides a listing of exemptions by state.

With secured debt, like a car loan or a home mortgage, the lender has a security interest in the property that can't be discharged in bankruptcy proceedings. Your ability to keep your home when filing a Chapter 7 bankruptcy depends on the equity you have in your home, the amount of the homestead exemption that applies in your state and your mortgage payment history. The same is true for the equity you have in your automobile.

In contrast, a Chapter 13 bankruptcy filing uses the bankruptcy court to arrange a repayment plan for the petitioner's outstanding debts. The repayment plan lasts from three to five years. At the end of the repayment plan the bankruptcy court will discharge any remaining eligible debts. It's really difficult to stick with this plan for the required three to five years.

A person filing a Chapter 13 bankruptcy typically remains in possession of the property that would be part of the bankruptcy estate in a Chapter 7 filing. Even in a Chapter 7 bankruptcy filing, you may be able to make arrangements with the court to hold on to some nonexempt assets. The U.S. Courts provides an electronic pamphlet titled Bankruptcy Basics that provides more information.

Your best move is to discuss your situation with a bankruptcy attorney to determine whether a Chapter 7 or Chapter 13 bankruptcy is the right decision for you.

-- Posted: Sept. 11, 2003