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What is the difference between Chapter 7 and Chapter 13 bankruptcy? P.2

Previously, we began looking at some of the basics of Chapter 13 bankruptcy, including generally how the process works and some of the eligibility requirements. Chapter 7 bankruptcy is different than Chapter 13 in that it involves the liquidation of assets in order to pay off creditors as opposed to a repayment plan. The bankruptcy trustee in a Chapter 7 filing is responsible for gathering and selling nonexempt assets, whereas the bankruptcy trustee in Chapter 13 cases is responsible for collecting payments and distributing them to creditors.

Different states have different rules regarding which assets are exempt and which are nonexempt. Some states have their own set of exemptions while other states use the list provided in federal law. Other states, including New York, have their own list of exemptions and allow debtors to opt for certain federal exemptions as well. 

Some examples of exempt property in New York include:

  • Homestead
  • Motor vehicle
  • Trust fund principal
  • Wrongful death recovery
  • Life insurance proceeds
  • Pensions
  • Public benefits
  • Certain retirement accounts and benefits

Unlike Chapter 13 bankruptcy, Chapter 7 bankruptcy is available to debtors regardless of how much debt they have or whether they are solvent or insolvent. What matters more in terms of Chapter 7 eligibility is the debtor's income. Too much income disqualifies a debtor. The tool used to screen a debtor's income is called the means test, which is applied if the debtor's current monthly income exceeds the state median income.

The means test involves looking at the debtor's aggregate monthly income over five years and determining whether it exceeds a set amount. If it does, abuse is presumed, though that presumption can be rebutted by presenting evidence that there are special circumstances which make it appropriate to adjust the monthly income calculation.

These features of Chapter 7 bankruptcy are why the process is sometimes referred to as "fresh start" bankruptcy, as opposed to Chapter 13, which is sometimes called "wage earner's" bankruptcy. In our next post, we'll look at the important issue of discharge as it relates to both Chapter 7 and Chapter 13 bankruptcy.

Sources:

U.S. Courts, Chapter 7-Bankruptcy Basics, Accessed Aug. 18, 2016.

Newyorkbankruptcylaw.com, New York Bankruptcy Exemptions, Accessed Aug. 18, 2016. 

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