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What is the difference between Chapter 7 and Chapter 13 bankruptcy?

When it comes to personal bankruptcy, there are two basic forms that can be pursued: Chapter 7 and Chapter 13. When many debtors reach the point of considering a bankruptcy filing, it may not be clear to them what form of bankruptcy they should pursue. What exactly are the differences between these two forms of personal bankruptcy, and how does a debtor determine which form is appropriate.

The basic distinction between Chapter 7 and Chapter 13 bankruptcy is that one, Chapter 7, is characterized by liquidation and Chapter 13 by reorganization. In the Chapter 7, the debtor’s non-exempt assets are liquidated and the proceeds used to pay creditors to the extent possible. Exemptions vary from state to state, but the basic idea is that the debtor is going to sell their assets and start over. 

In Chapter 13 bankruptcy, by contrast, has his or her assets valued and takes stock of income and expenses, and then comes up with three to five year repayment plan to get creditors paid. Not all creditors are going to always be paid in full, and debts remaining at the end of the process can usually be discharged.

Choosing between Chapter 7 and Chapter 13 is partly a matter of eligibility and partly a matter of a debtor’s personal circumstances and goals. As we’ve pointed out in previous posts, debtors must meet certain eligibility requirements to go forward with a Chapter 7 bankruptcy. Although Chapter 7 bankruptcy is a boon for some, it is not necessarily right for all debtors. Chapter 13 allows a debtor to keep all his or her assets, which can be beneficial, but it also requires a stead, sufficient income. Not every debtor can guarantee this.

Deciding which form of bankruptcy to file for isn’t always easy, and working with an experienced attorney can help a debtor properly evaluate his or her situation and to take stock of his or her options and goals.

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