What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Filing for bankruptcy is a serious, life-altering decision that should never be approached lightly. Before beginning the bankruptcy process, it is important to understand the progression a bankruptcy filing takes. There are two main types of bankruptcy: Chapter 7 and Chapter 13. In order to qualify for bankruptcy, you will need to prove that you cannot repay the debts that are in your name without some kind of outside assistance.

Chapter 7 bankruptcy means that every non-exempt asset you own will be liquidated in order to pay your creditors. It is likely that much of the property you own is considered exempt and, therefore, not subject to liquidation. A skilled bankruptcy attorney can take a look at your individual case and let you know what you would be able to keep should you file for Chapter 7 bankruptcy. If you choose to file for bankruptcy under Chapter 7, you will be required to take a "means test" to ensure your income is not higher than a certain amount. Should your income exceed that certain amount, you will not be considered eligible to file for Chapter 7 relief.

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A Chapter 13 bankruptcy filing focuses on debt reorganization. This means that you commit to repaying your debts over a time frame of three to five years. Chapter 13 can be an attractive option to those who have gotten behind on bills but have a source of income to pay them off at some point. Once you have filed for Chapter 13 bankruptcy, creditors may no longer contact you for repayment. If you are in the midst of foreclosure, a Chapter 13 bankruptcy filing will often stop the foreclosure process and allow you to remain in your home. Your total debt amount will be consolidated into one monthly payment, and it may be reduced to allow quicker repayment. Chapter 13 bankruptcy also allows you to retain non-exempt assets that would otherwise be liquidated in a Chapter 7 bankruptcy.

When considering bankruptcy as an option to relieve financial pressure, it is essential to note that bankruptcy will not eliminate some types of debt including mortgages, car loans, student loans, child support, spousal support, criminal fines, and even some taxes. These debts must be repaid, even with a bankruptcy filing. Also, any bankruptcy you declare will be reflected on your credit report for seven to ten years. Talking to a qualified bankruptcy lawyer will assist you with understanding how bankruptcy will affect your specific financial situation.

Since new bankruptcy laws were enacted in 2005, filing for bankruptcy has become a much more difficult and intricate process. If you or someone you know is considering bankruptcy, talking to an experienced legal professional is a vital first step.

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