Deciding Which Type of Bankruptcy to File

Many Americans these days are facing a financial crisis due to the bad economy. Unemployment remains at all time highs and inflation continues to devastate most average families. This has caused many people to consider filing bankruptcy to alleviate their overwhelming debt. However, when considering bankruptcy, a question that needs to be addressed is which type of bankruptcy to file. The answer really depends on the individual's personal financial circumstances. The two forms of personal bankruptcy that are commonly filed are Chapter 7 bankruptcy and Chapter 13 bankruptcy. These two kinds of bankruptcy are really designed for two different types of debt situations.

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A Chapter 7 bankruptcy, which is commonly referred to as a fresh start bankruptcy, is mainly used in situations where the debtor has mostly, if not all, unsecured debts. Unsecured debts are debts that are not secured by property or an item such as medical bills, credit card debt, or personal loans. In a Chapter 7 bankruptcy the bankruptcy trustee can liquidate or sell any personal property not protected by exemptions laws to pay back the creditors. However, due to the nature of the bankruptcy laws, it is not common that an individual loses any property in a bankruptcy filing. Instead the debtor can emerge from a Chapter 7 bankruptcy filing virtually debt free and retaining their possessions. If the individual filing Chapter 7 has some secured debt such as a car or a house along with their unsecured debt, they have two choices. They can give up the secured property and have the financial obligations for them added in to the bankruptcy filing and wiped out without any further liability to them in the future. The individual can also choose to keep, or reaffirm, the property and the debt as long as they are able to continue making the payments on them. The individual must qualify to file Chapter 7 bankruptcy by meeting the required income level for the state they reside in or they will be forced into filing Chapter 13 bankruptcy.

A Chapter 13 bankruptcy, otherwise referred to as a wage earner bankruptcy, is used when an individual makes too much to qualify to file a Chapter 7 bankruptcy, they really want to try and pay their financial obligations back, or they are behind on their payments for secured debts such as a car or home and they want to keep the property. In this situation when the debtor is in jeopardy of losing their home to foreclosure or their car to repossession, a Chapter 13 bankruptcy is king. The debtor will still receive the advantages of the automatic stay during the entire bankruptcy process prohibiting all debt collection activity and the debtor will work out an approved repayment plan with their bankruptcy attorney that will last for 3-5 years allowing them to get caught up on back payments. Any unsecured debt left over after paying the secured debts first will be discharged in the bankruptcy filing, thus allowing the debtor to keep their property. If at any time during the Chapter 13 repayment plan the financial situation of the debtor deteriorates, they can go back to their bankruptcy attorney and convert their Chapter 13 into a Chapter 7 bankruptcy.

The bottom line is that the debtor does have some options when looking at their situation. However, it is best to consult with a bankruptcy attorney in the beginning to discuss these options and which chapter of bankruptcy is best suited for their needs.

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