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The differences between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | May 7, 2023 | Uncategorized

Are you struggling with overwhelming debt and considering bankruptcy as a way out? If so, you may have heard of Chapter 7 and 13 bankruptcy. Although both options offer a fresh start to your financial situation, there are significant differences between the two.

Bankruptcy is a legal process that allows individuals or businesses to eliminate or reorganize their debt. The goal of bankruptcy is to provide debtors with a fresh start financially while also helping to ensure that creditors receive some repayment for their debts.

Liquidation vs. reorganization

Chapter 7 bankruptcy is known as liquidation bankruptcy. This means the debtor’s non-exempt assets may potentially be sold by the trustee assigned to their case, so that the proceeds can be used to repay their creditors. With that said, the vast majority of filers do not have any of their assets sold during the bankruptcy process. Any remaining debt is then discharged, giving the debtor a fresh financial start.

On the other hand, Chapter 13 bankruptcy is known as a reorganization bankruptcy. This means the debtor’s debts are reorganized into a manageable payment plan. The debtor pays a bankruptcy trustee, who then distributes the payments to the creditors.

To file for Chapter 7 bankruptcy, the debtor must pass the means test (as only low-income individuals qualify for Chapter 7) and meet specific eligibility requirements. Once the debtor files for bankruptcy, an automatic stay goes into effect. This stops virtually all collection actions from creditors.

To file for Chapter 13 bankruptcy, the debtor must have a regular income, and their debts must fall within specific limits. Once the debtor files for bankruptcy, an automatic stay goes into effect, which stops virtually all collection actions from creditors. The debtor must submit a repayment plan to the court, outlining how they’ll make management payments monthly over three to five years. The court and the creditors must approve the plan before it can go into effect.

Chapter 7 and Chapter 13 bankruptcy are each options that work well under certain circumstances. Seeking legal guidance can help you to determine which option might benefit your unique situation.

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