What’s The Difference In Chapter 7 & Chapter 13 Bankruptcy?

by William Blake

Are you at that financial point in your life where you’re considering filing for bankruptcy? There are two types of bankruptcy for you to consider as an individual: Chapter 7 and Chapter 13. They are very different and you need to learn the details of both before choosing one.

Chapter 7 is the most common. When a person files under Chapter 7, their assets are sold to pay the money that is owed to their creditors. The courts decide on the amount of payment based on an individual’s situation.

All of the assets are not exhausted. Each state has its own procedure as to what is to be liquidated and you may be able to keep your home and car.

The laws were changed in October 2005 regarding Chapter 7 bankruptcy. You now have to pass a test. Your income must be lower than the median income in your home state. You must also not have the assets available to pay at least 25% of your debt in order to qualify.

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 is now a little different with the new bankruptcy laws. The court used to decide what was necessary for you to pay or not. Things like rent or mortgages, groceries and utilities etc were deemed necessary. Now the IRS has a formula to determine this.

It is not easy to file for bankruptcy. A potential filer must first attend credit counseling. The government can also take any assets that were obtained just prior to declaring bankruptcy thus not making it an option to hide money within property previously purchased by abusers.

Bankruptcy filing is a serious matter. If you are determined to file, know which type you stand a chance of qualifying for with the courts. Since laws are tougher, be aware that bankruptcy lawyers will charge more for their part in the process.

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