When an individual declares bankruptcy, he or she has the option to declare under either Chapter 7 or Chapter 13 of the federal code. While the desired result for both is to make an individual's debts more manageable, the two chapters achieve this end in very different ways.
For Chapter 13, an individual has an automatic stay placed on all of his or her debts, meaning that creditors cannot hassle debtors about the money they owe. The individual is then responsible for working out payment plans with his or her creditors so that the payments are manageable.
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During this process, the individual does not part with property. This is how Chapter 13 and Chapter 7 differ. Under Chapter 7 bankruptcy, an individual's assets are liquidated. The resulting money is then paid to creditors. Any debts remaining after the disbursement of funds may be paid back through a payment plan, much like Chapter 13.
Many individuals are hesitant to declare Chapter 7 bankruptcy because they are unsure of what assets they will have to part with as part of the bankruptcy agreement. Usually, individuals must sell everything except for one home, one automobile, and any gifts or financial compensation awarded by a court. These possessions are known as exempt property.
This means that additional homes, additional vehicles, savings accounts (usually not including retirement plans), and other valuable possessions may be sold. These possessions are nonexempt property.
Protecting your assets during this process can be difficult. Legally, you are not required to seek counsel before filing for protection. However, many experts recommend discussing your options with a professional before making any permanent decisions.
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