Thinking of Filing Bankruptcy- Chapter 7 versus Chapter 13?

What's the Right Choice for me?

What’s the Right Choice for me?

I have been practicing consumer bankruptcy related law for 27+ years. Most people thinking about filing bankruptcy always ask me about the different chapters available under the bankruptcy code.  98% percent of the bankruptcies filed in the Rhode Island Bankruptcy Court are either chapter 7 or chapter 13 consumer cases. Over 90% of these filings are chapter 7 cases. So, what’s the difference?  In a chapter 7 bankruptcy, an individual usually keeps all of their assets and eliminates or discharges all or most of their debts.  Chapter 7 is the most favored option in Rhode Island because we have very generous exemption allowances.  An exemption is your right to keep certain property. So most people filing chapter 7 can keep their house, car, jewelry, retirement accounts, pensions, life insurance policies, small bank accounts and their children. In rare circumstances, an individual filing bankruptcy will be forced to relinquish or sell some assets that are not protected in bankruptcy. This does not happen very often. For example, in Rhode Island unlike other states, there is no right to protect settlements from a car accident or other personal injury claim. Small injury settlements, those under $10,000.00, can usually be protected in bankruptcy. The settlement proceeds from larger injury cases are often not exempt and must be turned over to the bankruptcy trustee. The trustee is the person who generally oversees the administration of your case. The trustee takes these nonexempt injury funds and uses them to pay some dividend to your creditors.  If you are thinking about filing bankruptcy in Rhode Island, make sure you tell your lawyer about any pending personal injury claims.

In a chapter 13 case, an individual gets to keep all of their assets but is required to pay a certain amount of money to a court appointed trustee for a period of 3 to 5 years.  The trustee uses these monies to pay mortgage arrearages, delinquent vehicle payments, certain tax debts and to pay some dividend to general unsecured creditors.  Many times an individual that would qualify for chapter 7 protection elects to file a chapter 13 because they have fallen behind on their mortgage and needs to use the bankruptcy system to reinstate payments and cure the arrearages over time. Some people are simply not eligible for Chapter 7 protection because they make too much money and therefore choose to file Chapter 13 to deal with their debts.  You don’t have to repay all your unsecured debts in chapter 13.  Your creditors receive a certain percentage based on a complicated formula which is based on household income. The larger the household income, the more you have to repay. The Chapter 13 process is definitely more complicated than Chapter 7.  The vast majority of chapter 13 cases in Rhode Island are filed to stop foreclosure and help reinstate a delinquent mortgage.   From my perspective, chapter 13 cases are always more invigorating because they provide a certain amount of flexibility for dealing with certain debts which is unavailable under chapter 7.

Christopher M. Lefebvre Esquire

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