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Chapter 7 vs. Chapter 13

For individuals seeking to get themselves out of bankruptcy, there are two main options: Chapter 7 or Chapter 13 bankruptcy. Both of these provides different benefits depending on the specific needs of the person that is filing for bankruptcy.

Understanding Chapter 7 Bankruptcy

The only people who are eligible to file for Chapter 7 are those that have not previously filed for bankruptcy in the past six to eight years and pass the means test (regarding disposable income). In this kind of bankruptcy, a person may sale their property in order to repay their debts to creditors.

Applying for chapter 7 bankruptcy takes less than 6 months, costs around $355 in fees, and requires a single trip to the courthouse. Those that choose to file using this method must attend credit counseling as well.

If a person is eligible to file for Chapter 7 bankruptcy, it may be in their best interests to choose this option over Chapter 13.

Some of the reasons a chapter 7 may be better include:

  • Emerge from debt in a shorter period of time
  • Have most debts wiped from the record and start fresh
  • Important property will not be taken in this filing
  • No need to repay debts that are discharged in bankruptcy

Once someone files for Chapter 7 bankruptcy, an order of relief will be granted, which will prevent creditors from trying to collect. For a short period of time, creditors are prevented from taking extreme actions to get what they are owed, such as repossessing a car. However, the order of relief is granted because possession of the property is being placed in the hands of the court. Any actions taken with the property must only be done so with the permission of the court.

Any property a person owes before they file for bankruptcy is in the hands of a bank trustee that will use these assets to pay off existing creditors. Should a person obtain property after filing, the bank in unable to use this to pay back debts.

At the end of the process all debts, except for those that the court declared to be nondischargable, will be wiped away.

Aspects of Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows the filer to keep all of their property as long as they pay back their debts within five years. Most debts will be completely paid off in this filing.

Chapter 13 may be the better option if a person is:

  • Ineligible for Chapter 7
  • Behind on loan payments
  • Have debts that cannot be discharged in Chapter 7
  • Have a co-debtor
  • Want to keep nonexempt properties

Those that file for Chapter 13 must prove to the court that they are able to pay off their debts. This means that they must have enough disposable income to pay back creditors in a repayment plan.

This kind of bankruptcy means that a person will create their own repayment plan that details how they intend to pay back their debts. If they are unable to pay back their debts using this method, they may be able to convert to a Chapter 7 filing.

Each individual's finical circumstance will make a difference when filing for bankruptcy. Consulting with an experienced bankruptcy attorney about the case can help a person choose which filing option will be in their best interests.

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