Which bankruptcy: Chapter 7 or Chapter 13?

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Dear Bankruptcy Adviser,
I would like to know which bankruptcy would be best — Chapter 7 or Chapter 13? We are both unemployed. The only income we received in 2009 is unemployment benefits as of September. We were living off our savings for eight months. We own three properties, with one as our residence. We have a business that has been bringing in income, but each month it is less and less and the income covers business expenses only. We would like to keep our three properties, how can this be possible?
— Elizabeth

Dear Elizabeth,
You will have to investigate a few things prior to making a final decision. As you said, bankruptcy comes in two flavors — Chapter 7 and Chapter 13.

Chapter 7 is known widely as “liquidation” or “straight bankruptcy.” Chapter 7 bankruptcy provides filers with protection from creditors and relief from many of the debts that have overwhelmed and burdened you. It will allow you to clear most of your outstanding debts quickly and get a fresh start in your financial life.

Chapter 13 is called a reorganization bankruptcy. This means you are going to make a monthly payment to the court for the next three to five years to pay off some or all of your debt. Under the terms of Chapter 13 bankruptcy, your unsecured debts — credit cards, loans, etc. — are combined into one category and a payment plan is developed based on income and acceptable expenses.

Before determining which chapter is available to you, a bankruptcy attorney would need the following information:

1. The value of your properties.

You need to know whether the properties are at risk since you want to keep them. You may need to pay for appraisals on each of the rental properties and your primary residence. You can check out valuation sites like Zillow.com to see whether equity may exist prior to ordering a full appraisal. However, the only way to be very confident about the value is through a full and complete property appraisal.

2. The value, if any, of your business and business assets.

This might not be much of an issue since you state that the business income equals expenses. Each business is unique and the typical small-business value is based on the owner’s best efforts and business relationships. Therefore, it is likely the value will not be significant enough to worry. You will have to put together a business profit-and-loss report for the past 12 months and six months.

This is a good place to start prior to meeting with an attorney. That will make any meeting more productive and allow the attorney to have a good sense of your bankruptcy eligibility.

You also will want to find out whether any of your business assets have value. You could have valuable patents, copyrights or business equipment. You may need business valuations of these assets since you will need them to operate your business.

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