Often known as a "wage-earner's plan," a Chapter 13 bankruptcy does not require liquidation of nonexempt assets to satisfy your creditors. Instead, you pay some or all of your unsecured debt back through the court over a 36- to 60-month period. The percentage of unsecured debt you are required to repay must be at least equal to what your creditors would receive if your nonexempt assets were liquidated as part of a Chapter 7 bankruptcy. If you successfully complete the court-ordered repayment schedule, any unpaid unsecured debt is then discharged.
You lose no property in Chapter 13 bankruptcy, because you fund your repayment plan through your income. In Chapter 7 bankruptcy, you select property you are eligible to keep from a list of state exemptions. Although state exemption laws differ, states typically allow you to keep these types of property in a Chapter 7 bankruptcy:
- Equity in your home (called a homestead exemption) - Under the Bankruptcy Code, you can exempt up to $20,200 of equity. Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home.
- Insurance - You usually get to keep the cash value of your policies.
- Retirement plans - Most retirement benefits are protected in bankruptcy.
- You'll be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry only worth up to $1,000 or so. Most states let you keep a vehicle as long as your equity doesn't exceed several thousand dollars. And many states give you a "wild card" amount of money -- often $1,000 or more -- that you can apply toward any property.
- Public benefits - All public benefits, such as welfare, Social Security, and unemployment insurance, are fully protected.
- Tools used on your job - You'll probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.