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Chapter 7 or Chapter 13 Bankruptcy?

With the economy struggling to gain traction, many Americans are still struggling with joblessness and debt. In these trying times, bankruptcy still remains a possibility to shed troublesome debt and keep personal property. Debtors have options as to how their debt may be discharged. This blog will highlight the most common forms of personal bankruptcy and describe the limitations with each.

Individuals seeking bankruptcy protection choose one of two types of bankruptcy; Chapter 7, known as liquidation or "straight" bankruptcy, or Chapter 13, called "wage earner's" bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 is used where there is little, if any personal assets, and there is no money left each month after paying expenses. In Chapter 7 cases, the bankruptcy trustee will gather and sell the debtor's non-exempt property (property with significant monetary value) to pay the outstanding bills, so a debtor may lose certain assets.

Debtors must satisfy a means test to be eligible for Chapter 7 bankruptcy. Unsecured debts are completely eliminated through Chapter 7, and the process moves rather quickly. Most debtors receive a discharge order within several months of filing their petition.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is used when a debtor seeks to retain significant property such as equity in a home, a high value car or other investment. Chapter 13 debtors enter into a repayment plan based on their disposable income. All debts are combined and restructured into one affordable monthly payment made to the Trustee, who uses this money to repay creditors. Debtors may retain their personal property while catching up on past due debts.

To be eligible for Chapter 13 bankruptcy, there are limits on the amounts of unsecured and secured debt one may have. Payment plans last for a period of 36 to 60 months, after which time certain debts will be discharged completely.

There are several factors to consider before choosing a form of bankruptcy, including your income and ability to adhere to a payment plan, the nature of your debts, and whether you want to retain possession of a home or car. An experienced bankruptcy attorney can help you decide which type of bankruptcy is right for you.

Source: Chapter 7 vs. Chapter 13

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