Chapter 7 Bankruptcy
With the filing of a chapter 7 bankruptcy, the debtor’s assets and liabilities are effectively frozen.
The debtor preserves the exempt assets, while the bankruptcy trustee liquidates the non-exempt assets and distributes the money to the existing unsecured creditors ( Arizona Exemptions ). The debtor is subsequently relieved (discharged) of the need to pay most existing obligations, and creditors cannot collect the bankrupt’s future earnings. Lenders with home or car loans are either paid in full, the current value, or the objects are surrendered to the lender.
Unless a court order is issued, fully secured creditors will keep their claim on the collateral.
The secured creditor may apply for a court order permitting them to seize the secured collateral (house or car). Fully secured creditors have no right to share in any liquidated asset distributions made by the bankruptcy trustee.
Chapter 13 Bankruptcy
In contrast, a chapter 13 bankruptcy focuses on future income rather than current assets.
The debtor is allowed to keep all of their assets and pay creditors from future earnings. Payments are sent monthly to the bankruptcy trustee, who pays the arrears on the property, vehicles, taxes, and child support; only if there is money left over, the trustee pays the existing unsecured creditors, who file proofs of claims. This is achieved through a three- to five-year court-approved plan. The balance of the unpaid obligations contained in the plan are forgiven at the conclusion of the plan (discharged).
Some debts, such as student loans, survive a chapter 13 bankruptcy.
A few debtors must file chapter 13 because they earn too much money. The means test contained in this form and required by the Bankruptcy Code will help Ms. Drain with this analysis. The good news is that a chapter 13 bankruptcy often allows the debtor to save their home, remove junior liens on their homes and pay off their vehicles.