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The Differences Between Chapter 7 and Chapter 13 Bankruptcy

There are numerous reasons why someone could wind up in a difficult financial situation. Perhaps someone lost their job or wound up buried in credit card debt. Many young people are struggling to pay back their student loans or medical bills. Many people will dip into their "rainy day" fund first, exhaust their savings, and ask friends and family for help. When this falls through, an individual who is struggling financially may make the decision to file for bankruptcy.

When it comes to filing for personal bankruptcy, the two most common types are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Understanding the differences is important in making an informed decision. While an experienced bankruptcy attorney can aid individuals in evaluating their specific circumstances, a general understanding can help to inform anyone who is contemplating bankruptcy and has yet to speak with an attorney.  

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a bankruptcy filing that is designed to forgive someone of virtually all of their unsecured debts. Examples of unsecured debts include credit card debt and medical bills. Filing for this kind of bankruptcy is an application process and someone must have next to no disposable income.

People who have an annual salary that is above the threshold could be legally bound to file for Chapter 13 bankruptcy instead. When someone files for this form of bankruptcy, someone will being the process of reviewing all of the applicant's assets. Some property will be sold off to pay back the creditors. Other property may be exempt from the bankruptcy process. There is a chance that all of the person's assets could be exempt. In this case, the creditors would not receive any of their funds back. For this reason, most people who file for Chapter 7 bankruptcy have few assets and little income. In this case, the creditors do not receive much compensation.

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, the person filing for bankruptcy generally has a way to pay back some or all of their debt. This kind of bankruptcy is filed by someone who has a regular job and a steady income. Before this bankruptcy petition is granted, the applicant will be required to file a repayment plan with the court. The court will mediate an agreement between the applicant and the creditors. If the plan is agreed to, the applicant will begin the process of repaying some or all of their debt.

Chapter 13 bankruptcy is often used to give someone the opportunity to get on top of missing mortgage payments. It also allows the person to retain ownership rights over all of their property, provided that they adhere to their repayment plan. This is why Chapter 13 bankruptcy is often called reorganization bankruptcy.

Clearly, these two forms of bankruptcy have significantly different implications. This is why filing for the correct bankruptcy chapter is vital to getting back on track. Anyone who is considering filing for bankruptcy should contact an experienced bankruptcy attorney in order to receive necessary legal guidance regarding the best choice for each individual set of circumstances. 

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