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Chapter 13 Vs Chapter 7 Bankruptcy

Jun 26, 2008
If you have had financial problems recently, you may be considering bankruptcy as a way to resolve the situation. In terms of personal bankruptcy there are two options open to you. These are chapter 7 and chapter 13 bankruptcy. This article will discuss the merits of each and contrast chapter 7 versus chapter 13 bankruptcy.

Chapter 7 bankruptcy is also known as a liquidation bankruptcy. Most people seek this option. When a person files for bankruptcy under Chapter 7, certain assets are liquidated and the money obtained is paid to the various creditors. The courts decide on an equitable agreement in terms of what is paid to creditors.

A liquidation bankruptcy may seem drastic (and it is) but it does not mean that you will be out on the street with nothing but the clothes you are wearing. Certain assets are exempt from chapter 7 bankruptcy. These are essential assets. So things like your house and car will not be liquidated. Each state has different interpretations of what is deemed to be exempt.

Having said this, chapter 7 bankruptcy has come under heavy scrutiny of late because of the rise in bankruptcies and the widespread abuse of the law. In October 2005, the law was changed to make it stricter.

Part of the changes to the law have included means testing for people to be eligible to file for chapter 7 bankruptcy. They must have an annual income that is below the median of the state in which they live. And they cannot have assets that total at least 25% of the total debt.

There are allowances for exceptions to the new ruling, so that people in unusual circumstances are not unfairly disadvantaged by the changes. For instance, the people that suffered during Hurricane Katrina were given special considerations allowing them to start again after flooding had destroyed their homes.

Chapter 13 is not as common. It is effectively going to court to ask for help in renegotiating your debts. Renegotiating generally means restructuring the time you have to pay off the debts and getting any creditors off your back. In some cases you can also renegotiate the size of the debt.

In this form of bankruptcy you do not lose your assets but still have to pay off all your debts. The aim of taking the process to court to get relief from creditors and to make the payment schedule more equitable for you and the creditors.

The changes to the bankruptcy statutes have changed how chapter 13 is applied too. Now the schedule of repayment is worked out by a formula created by the IRS rather than a court appointed trustee.

Both chapter 7 and chapter 13 bankruptcy have their place in getting people out of financial difficulties. Chapter 7 can help you start a fresh but you will lose most of your assets. Chapter 13 lets you pay off your debts without being harassed by creditors. It makes the debt more manageable.
About the Author
Get detailed information, including more on bankruptcy and chapter 7 and other ways to solve your debt problems at http://www.bankruptcyfixup.com
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