Many people including most lawyers are confused about the relationship of chapter 7 and chapter 13 of the bankruptcy code. They both provide for and discharge of debts. Unsecured debts are rare paid in full in either chapter. The principal difference resides in how secured debts are treated. This usually means how the house and/or the car creditor are paid.
A chapter 7 filing technically involves a liquidation of the filing individual’s assets; however every individual is entitled to what are called exemptions. Congress granted the individual States the right to set exemptions with some restrictions where you live determines what property is exempt form the claims of your creditors. In New York the Bankruptcy exemptions are set forth in sections 282 and 283 of the Debtor and Creditor Law.
Every state has a homestead exemption in New York this is $50,000 (or $100,000 per married couple). In Florida it is 100% of the homestead value. The way you apply the homestead exemption is to deduct the amount from the home equity. For example if a home is worth $200,000 and has a $150,000 mortgage then the home is fully exempt because the equity is the same as the $50,000 exemption.
The true difference between chapter 7 and chapter 13 arises when the mortgage is in default ( mortgage payments are over due). Technically the chapter 7 filing cannot be used to cure the default. The chapter 13 filing allows the back mortgage payments to be paid over a period of time up to 60 months. So a $6,000 default would be paid in sixty $100 payments. This is how the law was meant to work, but many courts allow the home owner a brief period to cure the default in chapter 7. The only way to determine what the court will do is to look at what has gone before. Accordingly, experience counts in picking attorneys and particularly when the default is a serious one. Fortunately the Bankruptcy Court sets the fee which often results in a standard flat fee arrangement in all cases.