If you have had financial problems recently, you may be considering bankruptcy as a way to resolve the situation. In terms of personal bankruptcy there are two options open to you. These are chapter 7 and chapter 13 bankruptcy. This article will discuss the merits of each and contrast chapter 7 versus chapter 13 bankruptcy.
Chapter 7 bankruptcy is effectively the liquidation of your assets to pay off all outstanding debts. If you are eligible for chapter 7 bankruptcy, the court effectively liquidates your assets and distributes the money to your creditors. This clears your debts and you can start again. Most people go for this option.
A liquidation bankruptcy may seem drastic (and it is) but it does not mean that you will be out on the street with nothing but the clothes you are wearing. Certain assets are exempt from chapter 7 bankruptcy. These are essential assets. So things like your house and car will not be liquidated. Each state has different interpretations of what is deemed to be exempt.
With this said, a chapter 7 bankruptcy is not as easy to take as it has been in the past. A general increase in bankruptcies and cases where the laws have been flouted have resulted in changes to the statutes. In October 2005, the chapter 7 laws were changed.
Based on the changes, certain means tests have to be passed before a person can file for Chapter 7 bankruptcy. A persons income must be below the median income for the state in which they are a resident. Also, a person cannot have assets that can cover at least twenty-five percent of their debt.
The laws still have some flexibility in them to make allowances for people that have had particularly bad luck or been the victim of freakish events. An example of this was the people that suffered after Hurricane Katrina hit. Many had flooded homes and lost most of their assets. They were allowed to file chapter 7 if they wanted to.
Chapter 13 is not as common. It is effectively going to court to ask for help in renegotiating your debts. Renegotiating generally means restructuring the time you have to pay off the debts and getting any creditors off your back. In some cases you can also renegotiate the size of the debt.
You will retain your personal assets including your home and car. The court will look into things like your income and how much you can reasonably afford to pay off each month without undue stress.
The changes to the bankruptcy laws have affected how chapter 13 is processed too. Before the changes the court would decide what debts had to be paid and come to an equitable arrangement. They would take into account your essential items before working out a debt repayment schedule, including things like rent/mortgage, groceries, and utility bills. Under the new law, the IRS has developed a formula that makes this determination.
Both chapter 7 and chapter 13 bankruptcy have their place in getting people out of financial difficulties. Chapter 7 can help you start a fresh but you will lose most of your assets. Chapter 13 lets you pay off your debts without being harassed by creditors. It makes the debt more manageable.