A person would generally consider filing under chapter 7, as opposed to chapter 13 when

  • all of there property is “exempt” from the bankruptcy estate
  • their income is less than median income
  • they have no need to file a chapter 13 plan of reorganization
  • they do not need to avoid an “underwater” second mortgage

A chapter 7 bankruptcy case does not involve the filing of a reorganization plan as in chapter 13.  

A person Chapter 13 may be appropriate if a person does not qualify for a chapter 7 due to the “means test,” needs  to modify their mortgage, avoid “underwater” second mortgages or association liens, or has nonexempt property.

Although chapter 7 cases are often referred as “liquidation” cases, in the vast majority of chapter 7 cases, a person does not lose any property to the bankruptcy  trustee as all of is property is “exempt” and not subject to administration and liquidation by the bankruptcy trustee. Some of the most important exemptions in Florida are the homestead, exemption, $1,000 to $5,000 exemption of personal property, $1,000 for vehicles, retirement plans, IRAs, life insurance, and annuities.  Vehicles are usually not subject to liquidation, as there the debtor owes more on the car than its value.

If there were non-exempt assets, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of creditor claim in accordance with the provisions of the Bankruptcy Code.

In addition, the Bankruptcy Code will allow the debtor to keep certain “exempt” property; but a trustee will liquidate the debtor’s remaining assets. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the loss of property.