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Bankruptcy May Be Your Option

What are the differences between Chapter 7 and 13 bankruptcies?

When unexpected life changes such as the unexpected loss of a job, a serious injury or a debilitating illness leave a person struggling with unpaid bills and overwhelming credit card debt, filing for bankruptcy might provide a solution. For most consumers seeking debt relief through the bankruptcy, a decision must be made between a Chapter 7 and a Chapter 13 petition.

The primary difference between Chapter 7 bankruptcy and a Chapter 13 is how each treats debt and assets. Most unsecured debts in may be eliminated in a Chapter 7, but there are limits on the assets that a debtor is permitted to retain.

A Chapter 13 bankruptcy results in the repayment of secured debts and the partial repayment of unsecured debts through monthly payments over a three or five year period.

The repayment plan is under the supervision of a bankruptcy trustee. Because payments are made toward repayment of a person's secured debts, a debtor might be able to stop repossession of a car by a secured creditor or stop foreclosure by a creditor holding a mortgage on the debtor's home.

The retention of real and personal property may be more of a problem for a debtor under a Chapter 7. Property that is not exempt from seizure to satisfy creditors under state or federal laws normally cannot be retained by the debtor in a Chapter 7 as it can in a Chapter 13. The trustee in a Chapter 7 takes control of non-exempt assets, sells them and distributes the money to creditors of the debtor.

Some debtors do not have enough income to make payments under a Chapter 13 repayment plan. This might leave a debtor with a Chapter 7 as the best option for debt relief. But individuals whose average monthly income exceeds their state's median income and have sufficient income to make payments under a repayment plan might not qualify for a Chapter 7.

Bankruptcy is a complex area of the law. The contents of this post present only an overview of the differences between two common forms of personal bankruptcy. It is not intended as legal advice, which should only be obtained by consulting with an attorney.

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