A Chapter 7 case will wipe out all or most of your personal liability from a closed sole proprietorship, corporation, LLC, or partnership.


If you have closed down a business, or are about to do so, filing a Chapter 7 “straight bankruptcy” case can be the best way of putting the debts of that business permanently behind you.

That Chapter 7 case will likely be a simpler one if you have a “no asset” case instead of an “asset” one. But an “asset case” may be worth the extra time it would likely take.

“Asset” and “No Asset” Chapter 7

Chapter 7 is sometimes called the liquidation form of bankruptcy. That usually does NOT mean that if you file a Chapter 7 case something you own will be liquidated, or sold. Most of the time you can keep everything you own. That’s if everything you own is “exempt”—included within a set of property “exemptions,” those types and amounts of property that are protected from your creditors. If everything is exempt, you would have a “no asset” case, so-called because the Chapter 7 trustee has no assets to collect.

In contrast, if you own something that is not exempt, and the trustee decides that it is worth liquidating and using the proceeds to pay a portion of your debts, then your case is an “asset case.”

The Quick “No Asset” and the Drawn Out “Asset” Case

Generally, a “no asset case” is simpler and quicker than an “asset case” because it avoids the asset liquidation and distribution-to-creditors process.

A simple “no asset” case can be completed in about three to four months after it is filed (assuming no other complications arise).  That’s in contrast to an “asset” case which always takes at least a few months more, easily a year or so, sometimes even multiple years.

Why does an “asset” case take so long? Because it can take time for a trustee to locate and take possession of an asset, sell it in a fair and open manner with notice to all interested parties, give creditors the opportunity to file claims to get paid out of the sale proceeds, for the trustee to object to any inappropriate claims, and then to distribute the funds as the law provides.  Each of these steps can take extra time. Especially if you have unusual or intangible asset, such as a disputed claim against a third party—a claim arising from an auto accident, for example—it can take a few years for the trustee to resolve and convert such a claim into cash, keeping the bankruptcy case open throughout this time.

The Potential Benefits of an “Asset” Case

If the trustee does have some asset(s) to collect from you, that can be turned to your advantages.  Two situations come to mind.

First, you may decide to close down your business and file a bankruptcy quite quickly after that in order to hand over to the trustee the headaches of collecting and liquidating the assets and paying the creditors in a fair and legally appropriate way. If you’ve been fighting for a long time to try to save your business, you may well find it not worth your effort to negotiate work-out terms with all the creditors. And you likely have no available money to pay an attorney to do this for you.

Second, you may particularly want your assets to go through the Chapter 7 liquidation process if the debts that the trustee will likely pay first out of your assets are ones that you especially want to be paid. The trustee pays creditors according to a legal list of priorities. For example, at the top of that list are child and spousal support arrearages, with certain tax claims not far behind. You may well want to take care of claims by your ex-spouse and/or children and the tax authorities. That’s especially true if you would continue to be personally liable on these obligations after the bankruptcy is over. 


How does a Chapter 13 “adjustment of debts” protect what you may otherwise lose in a Chapter 7 “straight bankruptcy”?


Chapter 13 is often an excellent way to keep possessions that are not “exempt”—which are worth too much or have too much equity so that their value exceeds the allowed exemption, or that simply don’t fit within any available exemption.

Options Other Than Chapter 13

If you want to protect possessions which are not exempt, you may have some choices besides Chapter 13.

You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need, such as equipment or inventory from a business that you’ve closed.  Surrendering an asset under Chapter 7 may also make sense if you have “priority” debts that you want and need to be paid—such as recent income taxes or back child support—which the Chapter 7 trustee would pay with the proceeds of sale of your surrendered asset(s), ahead of the other debts.

There are also asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures beyond the scope of this blog post.

Chapter 13 Non-Exempt Asset Protection

If you have an asset that is not protected by an exemption which you really need or simply want to keep, by filing under Chapter 13 you can keep that asset by paying over time for the privilege of keeping it.  Your attorney simply calculates your Chapter 13 plan so that your creditors receive as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee.

For example, if you own a free and clear vehicle worth $3,000 more than the applicable exemption, you would pay that amount into your plan (in addition to amounts being paid to secured creditors such as back payments on your mortgage). You would have 3 to 5 years—the usual span of a Chapter 13 case—throughout which time you’d be protected from your creditors. Your asset-protection payments are spread out over this length of time, making it relatively easy and predictable to pay.

This is in contrast to negotiating with a Chapter 7 trustee to pay to keep an asset, in which you would usually have less time to pay it and less predictability as to how much you’d have to pay.

Chapter 7 vs. Chapter 13 Asset Protection

Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset, and other factors.

First note that people with assets to protect have other reasons to be in a Chapter 13 case, and the asset protection feature is just one more benefit.

Furthermore, in some Chapter 13s you can retain your non-exempt assets without paying anything more to your creditors than if you did not have any assets to protect. If you owe recent income taxes and/or back support payments (or any other special “priority” debts which must be paid in full in a Chapter 13 case), you can use these debts to your advantage. Since in a Chapter 7 case such “priority” debts would be paid in full before other creditors would receive any proceeds of the sale of any surrendered assets, if the amount of such “priority” debts are more than the asset value you are seeking to protect, you may well only need to pay enough into your Chapter 13 case to pay off these “priority” debts.

This way you would get an immediate solution—your assets protected right away and the IRS or other “priority” debt creditor off your back. And you’d have a long-term solution, too—your assets would be protected throughout the Chapter 13 case, and the IRS and/or other “priority” creditor would get paid off. Once your case is completed, you would be debt-free. 


If you moved to your present state less than two years ago, when you file bankruptcy can affect how much of your property is protected.


Even though bankruptcy is a federal procedure, the state where you are “domiciled” can greatly affect how much of your property you can protect in bankruptcy. In a Chapter 7 “straight bankruptcy” case, this can determine whether you have to surrender any of your property to the bankruptcy trustee. In a Chapter 13 “adjustment of debts” case, this can determine how much you need to pay to your creditors during your payment plan.

Property Exemptions Can Be Very Different State to State

The property exemption laws of one state can be radically different from those of another state, even if that state is right next door.

Take the example of the exemptions available to a person who lives in Mobile, on the southern tip of Alabama, and those available to someone who lives an hour drive to the east in Pensacola, on the Florida Panhandle.

First one similarity: both Alabama and Florida, like a majority of the states, require their residents to use their state property exemptions instead of a federal set of exemptions in the Bankruptcy Code. So a long-time resident of Mobile must use the Alabama exemptions in her bankruptcy filing, while a long-time resident of Pensacola must use the Florida exemptions.

These two states’ homestead exemptions—the amount of value in your home that you can protect from creditors—are a stark example how exemptions can be radically different. Alabama has one of the least generous homestead exemption amounts—$5,000 in value or equity, or $10,000 for a couple—while Florida has one of the most generous—unlimited value or equity. Simply put, if a person owned a $150,000 free and clear home in Mobile (or one with that much equity) and filed a Chapter 7 case, the Chapter 7 trustee would take that home, sell it to pay creditors, and give the person the $5,000 exemption amount (and possibly any left over after paying the creditors in full). That same valued house in Pensacola (or one with that much equity) would be completely protected, the trustee could not touch it, and the creditors would get nothing from it.

(Note that if you “acquired” your present homestead within 1,215 days (about 40 months) before filing bankruptcy—and the equity for it did not come from a prior principal residence in that same state—then your homestead exemption is limited to a maximum of $155,675, even if your present state’s exemption is more generous. (See Section 522(p) of the Bankruptcy Code.) The point of this law is to discourage people from moving to and buying a house in a state with a high or unlimited homestead exemption in order to shield their assets from bankruptcy.)

Choosing between Your Prior and Present States’ Exemptions

You may have an opportunity to take advantage of the difference in exemptions between your prior and present state because of the bankruptcy law that determines which state’s laws you must use. If you have lived in your present state for the last 730 days (2 times 365 days), then the property exemptions which will apply to your bankruptcy case are the ones allowed in your state. However, if you moved during these last 730 days from another state, then the exemptions of your prior state will apply.

(To be picky, you follow the law of the state where you had your domicile—generally, where you were living—“during the 180 days immediately preceding the 730-day period.” See Section 522(b)(3)(A) of the Bankruptcy Code for all the gory details.)

So if you moved from another state to your present state in less than two years, and you file a bankruptcy before the 730-day period expires, than you must use the exemptions of your prior state. But if you wait until immediately after that 730-day period expires, you must use the exemptions of your present state.

Find Out If the Different States’ Exemptions Matter to You

It is definitely possible that all of your property is protected by the exemptions available in EITHER state. The contrast in homestead exemptions above between Alabama and Florida is an extreme one. Most people who file bankruptcy do NOT lose any of their property. So the first thing you need to do if you have moved in the last two years from another state and are in financial trouble is talk to a local bankruptcy attorney. Find out if you have any assets which would be protected better by either of your two states. And if so, see if it is worthwhile in your particular situation to pick when you file your bankruptcy case based on which state’s exemptions are better for you. You certainly don’t want to be in the situation when you find out too late that you could have protected your property better by filing a few months or even a few days earlier. 


Chapter 13 is often your best option for holding onto your home. That may be simply because it solves one of your major home debt problems, or instead because it solves a bunch of them all in one package.


If you’ve heard that Chapter 13 bankruptcy—the three-to-five year plan for “adjustment of debts”—is a good way to save your home, you’re probably thinking of a particular problem that you heard it solves. But the true beauty of Chapter 13 is in how many different kinds of problems it can handle all at the same time. So even if your home is being attacked from multiple directions, this bankruptcy option can often successfully defend against all those attacks.

But don’t get the false impression that if you are in danger of losing your house, Chapter 13 can necessarily save it. Even with all of the different ways it can help, this type of bankruptcy has its limits. Your situation has to fit for it to work.

I have a list of ten distinct ways that Chapter 13 can save your home, five covered in this blog and then five in the next one. This list of ten will give you a good sense of the multiple powers of Chapter 13, but also some sense of their limits.

1. Stretch out mortgage arrearage payments: This is the one you likely hear about most often: reduce what it costs you each month to catch up on your back mortgage payments by using up to five years to do so. This is in contrast to the much shorter time you’d have to catch up—likely a year or less—on the back payments, and the much, much higher monthly payments you’d have to pay to do so, if you had instead filed a Chapter 7 case.

2. Junior mortgage strip: Through Chapter 13—but not Chapter 7—you can “strip” a second or third mortgage lien off your home title. This often saves you hundreds of dollars monthly that you could instead pay to other more crucial obligations—or to your living expenses. And in the long run it can often save you thousands or tens of thousands of dollars. Very importantly, getting rid of some of the debt on your home can either create equity in your home where you did not have any, or at least make it less underwater than it had been.

3. Flexibility in buying more time for your home: There are all kinds of situations in which you need to buy time for your home, but not just the straightforward one for catching up on the mortgage arrearage. If you need to stop your house from being foreclosed to have time to sell it, or if you want to delay selling your home until two years from now when a child graduates from a local school, or when you qualify for retirement or expect some other definite change in your finances, Chapter 13 can often give you more control of the situation. Instead of being under the protection of the bankruptcy court for only the three months or so of a Chapter 7 case, you can potentially be protected for years under Chapter 13. Mind you we would have to formulate a plan to keep the mortgage creditor happy during this time. But the point is that there may well be creative ways to meet your goals without just being at the mercy of your lender, as you would pretty much be after, or even sometimes during, a Chapter 7 case.

4. Property taxes: When you fall behind on mortgage payments, at the same time you can also fall behind on your property taxes. Not paying a property tax payment on time is usually a separate breach of your contract with your mortgage lender, giving it another reason to foreclose on the property. Chapter 13 provides an excellent way to catch up on those taxes, while at the same time preventing the lender from using your missed tax payment as a reason to foreclose in the meantime. And because interest on property taxes is often higher than other secured debts, in your Chapter 13 Plan you may well be able to save money by paying off this tax debt earlier than other obligations.

5. Income tax liens: While I’m talking about taxes, Chapter 13 is also often the best way to satisfy an income tax lien which has attached to the title of your home. IRS and other possible state tax liens are generally not shielded by a homestead exemption, and have to be paid even if the underlying tax would otherwise have been discharged in bankruptcy. After a Chapter 7 case, you are left to fend against the tax authority on your own, facing the potential seizure of your home, with that used as intense leverage against you. In contrast, in Chapter 13 you are protected from such seizure, and as with property taxes can generally earmark payments towards the tax lien before most other creditors so that it gets paid off. It’s a much less worrisome and sensible way of taking care of this kind of scary debt.

These are the first five powerful ways that Chapter 13 can solve debt problems involving your home. Please come back in a couple days for the other five.


Can you keep your tax refund if you file a Chapter 7 case? It’s mostly a matter of timing.


Here are the bullet points:

  • Everything you own at the time your Chapter 7 bankruptcy case is filed becomes your “bankruptcy estate.” Usually, most or all of that “estate” stays in your possession and you get to keep because it’s “exempt,” or protected.
  • That “estate” includes not only your tangible, physical possessions, but also intangible ones—assets you own that you can’t physically touch—such as money owed and not yet paid to you.
  • Depending on the timing, a tax refund can be an intangible asset that becomes part of your bankruptcy estate. Then whether you can keep it or not depends on whether it is exempt.
  • Because an income tax refund usually consists of the overpayment of payroll withholdings, the full amount of that refund has accrued by the time of your last payroll withholding of that tax year. So even though nobody knows the amount of your refund until your tax return is prepared a few weeks or months later, for bankruptcy purposes it is all yours as of the very beginning of the next year.
  • So if you file a Chapter 7 case after the beginning of the following year and before you have received your tax refund, it is part of your bankruptcy estate and the trustee can keep it if it is not exempt, or can keep as much of it as it not exempt. That’s also true if you have received the refund and not done anything with it.
  • You can avoid this by filing your tax return and receiving and appropriately spending the refund before your Chapter 7 case is filed. DO NOT do this without very specific advice from your attorney. The bankruptcy system is very interested in what money you receive and precisely how you spend it before filing bankruptcy, and you can very easily get into trouble if this is not all done very carefully.
  • If the bankruptcy is filed so that the refund is an asset of the bankruptcy estate, whether or not it is exempt depends on how large it is and how much of an exemption is allowed in your state. In some cases, using all or part of an exemption for the tax refund may reduce the availability of the exemption for other assets.
  • Some states have specific exemptions applicable to certain parts of the tax refund, or laws that exclude them from the bankruptcy estate altogether, particularly regarding the Child Tax Credit or the Earned Income Tax Credit. These likely do not exist in a majority of the states, but it’s worth checking.  
  • Even if the refund, or a portion of it, is not exempt, the Chapter 7 trustee may still NOT claim it if he or she determines the amount is not enough to open an “asset case.” That is, the amount of refund to be collected is so small that the benefit of distributing it to the creditors is outweighed by the administrative cost involved. You might hear a phrase similar to the amount being “insufficient for a meaningful distribution to the creditors.” This threshold amount can vary from one court to another, indeed from one trustee to another, so be sure to discuss this with your attorney. But note that if the trustee is collecting any other assets, then most likely he or she will want every dollar of tax refunds that are not exempt.
  • There is a risk that you will not be able to claim an exemption if you don’t list the tax refund to which the exemption applies. So be sure to always list any tax refund to which you may be entitled.
  • Although I’m focusing on this issue now because we are in tax season, the same principles apply year-round. Frankly, it can be a little harder to wrap your brain around this as applied to, say, filing a bankruptcy in the middle of the year. As of July 1, you’ve had a half-year of tax withholdings deducted from your paychecks and forwarded by your employer to the taxing authorities. So, assuming the same amounts were withheld throughout the year, if you end up getting a substantial refund the following spring, for bankruptcy purposes about half of that had accrued by mid-year. So a bankruptcy filed on July 1, needs to take that into account. Some Chapter 7 trustees don’t push this issue much until the last quarter of the year, when that much more of the refunds have accrued. But regardless, tell your attorney about income tax refunds anticipated the following year, particularly if you have a history of relatively large tax refunds.


Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge.  The three examples in this blog should convince you that you want to avoid being rushed to file your case because a creditor sued you earlier and is now garnishing your wages. Instead you want to preserve the ability to file bankruptcy at a time that is tactically the best for you.

1. Choosing between Chapter 7 and 13:  Being able to file a Chapter 7 generally requires you to pass the “means test.” This test largely turns on a very special definition of “income.” For many people, their “income” under that definition can change every month, sometime by quite a lot. This means that you may not qualify to file a Chapter 7 case one month but then do so the next month. Being able to delay filing your case means being able to file when you will pass the “means test,” or at least more likely would do so, and therefore not be forced to file a Chapter 13 case. This means usually finishing your case in three or four months instead of three to five years, and almost always saving many thousands of dollars.

2. Discharging—writing off—debts:  Getting certain debts discharged is harder if those debts were incurred within a certain amount of time before the filing of your bankruptcy case. So being able to delay the filing of your bankruptcy case makes it less likely the creditor on one of these debts would challenge your ability to discharge that debt. Or if such a creditor would still raise such a challenge, defeating it would be easier.  The amount at stake is the amount of that debt, plus often the creditor’s costs and attorney fees, and your own attorney’s fees.  Avoid or reduce the risk of continuing to owe that after your bankruptcy is over by avoiding getting creditor judgments against you.

3. Choosing property exemptions:  The possessions you are allowed to keep in a bankruptcy depend on which state’s exemption laws apply to your case. If you moved to your present state of residence within two years before your bankruptcy is filed, you will not be able to use that state’s exemptions but rather your former state’s. Especially if you are getting close to the two-year mark, having flexibility about when to file would allow you to pick whichever state’s exemptions were better for you. Otherwise, you may either lose an asset in a Chapter 7 case, have to pay the trustee to be able to keep it, or else even be compelled to file a Chapter 13 case to keep it.

You may sensibly ask: if you do get sued, what are you supposed to do to avoid getting a judgment against you, so that you’re not later rushed into filling bankruptcy at an unfavorable time?  The answer: see a bankruptcy attorney as soon as you get sued to figure out how to deal with that law suit and with your entire financial circumstances. The earlier you get advice, the more options you will have.

The amount of property you get to keep in a bankruptcy is the result of a 200-year-old Constitutional battle of states’ right versus federal power.  The Bankruptcy Code provides for a uniform federal set of property exemptions, but if you live in one of 35 states you cannot use those exemptions. Instead you’re stuck with your state’s separate set of exemptions. Your state has chosen to “opt-out” of the federal exemptions.

If bankruptcy law is federal law, how come states get to do that? Here’s the back story to this legal oddity.

You’ve heard that the idea of bankruptcy was important enough to our country’s founders that they put it into the U.S. Constitution. It’s right near the top, in Article 1. The enumerated powers of Congress include “to establish… uniform Laws on the subject of Bankruptcies throughout the United States.”

But did you know that we did not have a federal bankruptcy law for most of the century after the signing of the Constitution? And that the reason we didn’t is in large part because of the contentious issue of property exemptions?

How so? Throughout the 1800s—way before and long after the Civil War–the country waged a political and economic war between Northeastern bankers and Western and Southern farmers and small merchants. Because of reoccurring devastating financial “panics” throughout the century, the farmers and merchants had good reason to worry about losing their homes and farms to out-of-state creditors. Largely in response to this, the first law exempting property from the collection of debt was adopted in 1839 in the Republic of Texas, and spread quickly through the South and the Midwest during the 1840s and 1850s.

Also in reaction to those severe “panics,” three different federal bankruptcy laws were passed and signed into law during that century. But each resulted from a delicate regional compromise to address the immediate economic turmoil, and all were repealed as soon as the economy improved and the political winds shifted. When the first long-standing law finally passed in 1898, it could only get enough votes by allowing debtors filing bankruptcy to use their state law exemptions.

That 1898 bankruptcy law lasted 80 years. When it was repealed and replaced with the current Bankruptcy Code in the late 1970s, some in Congress wanted to continue using state exemptions, while others wanted to impose a mandatory uniform federal system.  The compromise: as I said at the beginning, you can choose between a federal set of exemptions or the local state exemptions, UNLESS you are a resident of one of the 35 states which has “opted out” of the federal exemptions, requiring you to use that state’s exemptions.

Sounds like a big win for states’ rights. States get to have their way whether they want their residents to have exemptions more generous or more narrow than the federal ones, and whether those residents have the choice between the two exemption systems or must use the state one. This system can help you or hurt you depending where you live and what you own. For better or for worse, it sure is a big exception to the Constitution’s pronouncement about “uniform laws on the subject of Bankruptcies.”

In my last blog I said that non-citizens—legal or not—can file bankruptcy. All they need is appropriate identification. But that begs two questions: 1) Would that non-citizen receive all the benefits from that bankruptcy that a citizen would receive?  2) And would filing the bankruptcy hurt a legal non-citizen’s efforts to become a citizen, or would it increase an illegal immigrant’s risk of deportation?  

I’ll address the first of these questions now, and the second one in my next blog.

Two benefits of bankruptcy pertain here:

1. The protection of assets from the bankruptcy trustee (and thus from the creditors) through “exemptions.”

2. The granting of a discharge of debts.


The rules about what property of a debtor is exempt do not directly change with the debtor’s citizenship status, but there are potentially very important indirect effects.

Bankruptcies filed many states use that state’s own set of exemptions. So the federal bankruptcy court has to interpret that state’s definitions of those exemption definitions. Some of those definitions and the court’s interpretations of them can disqualify some immigrants. For example, Florida has a very generous homestead exemption, but In order to qualify for it, a debtor must be a permanent resident of the state with the intent to make the property in question his permanent residence. This residency requirement can be satisfied by a non-citizen only if he or she has gotten permanent resident status–a “green card”—as of the date of the filing of the bankruptcy. In a recent case, the immigrant was in the process of getting his permanent residency and in fact received that status three months after filing bankruptcy, but he was still deemed not to be a permanent resident at the time of his bankruptcy filing and so was denied a homestead exemption.


Again, the rules about what debts can be discharged and which cannot are the same regardless of citizenship. But some non-citizens have debts which were incurred in another country, leading to the question whether those debts can be discharged in their U.S. bankruptcy case.

It depends.

First, assuming that the creditor is given appropriate notice of the bankruptcy, and the debtor successfully gets a discharge of his or her debts, that creditor will no longer be able to try to collect that foreign in the U.S.  

But second, there is a good chance that the U. S. bankruptcy court’s discharge of this debt does not result in the discharge of the debt under the laws of the original country. If so, then that debt can continue to be collected according to the laws of that country, presumably against the debtor’s assets in that country, and perhaps in other countries outside the U. S. This depends on complicated international issues like treaties between the U.S. and that country, and whether they have “comity”—an agreement to respect each other’s laws—specifically in the area of bankruptcy. Otherwise, if the debtor has property outside the U. S., or intends to return to the other country, even just to visit, these issues should be investigated very closely, likely with both your U. S. bankruptcy attorney and one in the other country. In some situations, it even may be necessary to file the appropriate form of bankruptcy in the other country, assuming that exists and the debtor qualifies to do so.