Differences between Chapter 7 and Chapter 13 Bankruptcy

by William Blake

Is the financial situation in your life such that you need to file for bankruptcy? If so, there are two types of bankruptcy that apply to the individual: Chapter 7 and Chapter 13. They differ in many ways. Learn the details of both before choosing which type of bankruptcy to file for.

Most people who must declare bankruptcy do so by filing for Chapter 7 bankruptcy. This will pay back the money that a person owes by liquidating their assets. Afterwards, the court will consider the situation and determine how much must be paid to creditors.

One hundred percent of the person’s assets will not liquidated. In some cases, people who file for Chapter 7 bankruptcy are able to keep their home and car. The liquidation process is based off of specific state laws.

Chapter 7 bankruptcy laws saw some changes in October of 2005. Now, in order to qualify for Chapter 7 bankruptcy, you must have a total income that is below your state’s median and then pass a testing process. If your current assets would allow you to pay for 25% of your total debt, you will not be able to apply for Chapter 7 bankruptcy.

Special circumstances have to be demonstrated by the filer in order to override the testing requirements. Special circumstances were extended to victims of Hurricane Katrina so that they could have the chance of a new start after the flooding disaster that destroyed their homes. If the judgment is against filing for Chapter 7 you may appeal, but this involves another trip to the courts and extra expense. If you feel that you need to be heard, it could be worth it.

Chapter 13 bankruptcy involves repayment of the debt owed to creditors. You are given a time frame to pay off your debt and means are developed for you to do so. The assets that you own are not liquidated. The courts look at your finances and determine what you can reasonably afford to pay back to the creditors.

This process has also changed due to adjustment in laws regarding bankruptcy filing. Necessary expenses like groceries, utility bills, and rent or mortgage were once determined by the court, but this is no longer the case. Now an IRS formula is used to decide which expenses are considered to be necessary.

The government wants people to think long and hard about filing for bankruptcy. Before any bankruptcy proceedings take place, the potential filer must attend credit counseling. Also, the government can liquidate or non-exempt any assets that were purchased right before bankruptcy was declared. The attempts to hide money within property not subject to seizure are no longer an option for abusers of the system.

Bankruptcy proceedings are very serious and you should know which chapter you choose to file under and why before beginning the process. Be warned, bankruptcy lawyers are now charging more for their services since the filing process has become more complicated because of recent changes in the law.

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