Chapter 7 vs. Chapter 13
Individuals typically file one of two types of bankruptcy: Chapter 7 or Chapter 13. Chapter 7 bankruptcy liquidates the assets of the filer and uses the money from those assets to pay off creditors. Chapter 13 bankruptcy allows someone who has an income to restructure his debt under a repayment plan. A Chapter 13 debtor pays a bankruptcy trustee each month; the trustee then pays the creditors in accordance with the repayment plan. During the Chapter 13 case, the creditors must cease collection efforts, including foreclosure plans.
At the end of either type of case, the debtor receives a discharge of most remaining debt not paid by liquidation or the repayment plan, and the debtor no longer has to pay those discharged debts. Some debts cannot be discharged under either type of bankruptcy, including alimony and child support, certain government-guaranteed student loans, debts for criminal restitution and debts for some injuries caused by the debtor.
Under Chapter 7, a filer must have an income that does not exceed the median wage of Hawaii residents unless he can pass a “means test.” This median income is adjusted periodically. In summer 2012, it ranged from $52,712 to $102,579, depending on family size. The means test makes the debtor ineligible if his current monthly income over five years, less allowable expenses, exceeds $11,725 or 25 percent of total allowable debt of at least $7,025. Chapter 13 places a limit on the debtor’s debt rather than his income -- $360,475 for unsecured debts, like credit cards, and $1,081,400 for secured debts, like mortgages.
Certain assets are exempt from bankruptcy, which means they are not liquidated under a Chapter 7 case. Hawaii allows filers to choose either Hawaii's exemption list or the federal one, but they cannot be combined. The homestead exemption allows the head of the family to exempt the property where he lives, up to $30,000. However, if the property goes above $30,000 in value during the bankruptcy, he might be forced to sell it. Personal property, such as books, appliances and clothing, is also exempt under Hawaii’s exemption list. Vehicles are exempt up to a wholesale value of $2,575. If you are married and file jointly, each spouse can claim the full value of each exemption.
Retirement and Insurance
Many retirement accounts, pensions and insurance policies are exempt from seizure during bankruptcy. For example, under Hawaii’s exemption list, disability insurance benefits, certain life insurance and public employee pensions are exempt from liquidation in a Chapter 7 bankruptcy. Assets, including retirement plans, are typically not seized under Chapter 13, but retirement fund payments may be considered income upon which to base your Chapter 13 repayment plan.