There are generally two types of consumer bankruptcy cases our clients file. The first option we always look at is Chapter 7. A Chapter 7 bankruptcy filing is a “liquidation” bankruptcy. Liquidation means that all of the non-exempt, non-encumbered property of the Debtor can be sold or traded for cash to pay the Debtor's creditors.
When looking at the client's best options for filing bankruptcy, it is important that all of the client's property is identified and valued. It is also just as important to identify any creditor who has claimed a security interest in the property. Finally, all equity ( value of property minus principal balance of secured loan) must be determined.
When you file a Chapter 7 bankruptcy case there is a Chapter 7 Trustee appointed to represent the “bankruptcy estate.” The bankruptcy estate includes all of your property. At this point, the determination by the Trustee as to what property can be liquidated involves the Trustee's review of the debtor's Schedules A/B ( real estate and personal property, Schedule C (state law exemptions) and D ( secured creditors).
Your attorney should prepare your Chapter 7 petition to show all of your property, to claim all available state law exemptions, and to list accurately all secured debts. If it appears that you are at risk of losing your property in Chapter 7, due to too much equity in property, then the attorney should discuss filing a Chapter 13 bankruptcy.
In Chapter 13 bankruptcy the debtor keeps all of the debtor's property at the time of the filing of the case. Chapter 13 requires a payment Plan ( Chapter 13 Plan) to be filed and confirmed by the U.S. Bankruptcy Court. The debtor's objective is to pay only what is required to be paid to priority, secured and unsecured creditors while the creditors want to maximize what they get paid.
The value of property, amount of secured debt and available state law exemptions affects what is paid to the unsecured creditors in a Chapter 13 case. Creditors in Chapter 13 are entitled to be paid, over a time period between 36 to 60 months ( the max) an amount equal to what they would be paid in a Chapter 7 bankruptcy case.