How Do You Decide Between Chapter 7 And Chapter 13 Bankruptcy?

Bankruptcy is a method in which consumers or businesses can reduce or eliminate all or part of their debts. The federal bankruptcy court protects the debtor from the creditor during the process of the bankruptcy and following the proceedings as well. Your first step in deciding to file bankruptcy is determining what type of bankruptcy is best for your financial situation.

Chapter 7 Bankruptcy

Chapter 7 bankruptcies fall under the liquidation category. Liquidation means the bankruptcy trustee, in order to pay back some of your debt, may take and sell some of your property. Some properties are exempt under state laws, but you will need to look into what is not protected and what could potentially be seized to repay your debts before choosing a Chapter 7 bankruptcy.

Typical exemptions will be household furnishings, clothes, and a car. Loans that secure your property such as a mortgage or a car loan will help protect that property from the trustee. Every state is different and the value of your loan free car also determines if the trustee can or will take it or not.

The good thing about a Chapter 7 is that in return for this liquidation, most or all of your unsecured debts will be eliminated. Unsecured debts are typically unsecured credit cards, medical debts, and personal loans that did not use personal property as collateral for the loan. If you have secured debt, such as a car loan for which the car itself is promised as a guarantee of payment, you have the choice of allowing the creditor to repossess the property, to continue the payments on the property as agreed upon in the contract, or paying an agreed upon lump sum which is typically equal to the amount of the current replacement value of the property.

It is also important to know that Chapter 7 cannot eliminate all debts. Some debts like child support, spousal support, tax debts, and some student loans are protected under bankruptcies laws and will require repayment as agreed upon. While Chapter 7 bankruptcies are the best in terms of clearing off debts, not everyone is allowed to file. If your disposable income is sufficient to pay for a Chapter 13 repayment plan after subtracting living expenses, then you will be obligated to file a Chapter 13 bankruptcy instead.

Chapter 13 Bankruptcy

Chapter 13 bankruptcies are a repayment and reorganizing bankruptcy. Chapter 13 does have debt limits set by the federal government that you will need to look into to make sure you do not exceed the debt limit. In a Chapter 13, you will be required to propose a repayment plan for each of your debts that shows how you plan to pay back your debt over the next three to five years.

The minimum amount you will be required to pay back depends on your income, your debt amount, and how much the creditor would have been paid if you filed Chapter 7. Secured debts can also be included in order to make up missed payments to keep the creditor from repossessing your property, for example a house that is in danger of foreclosure because of missed payments. Chapter 13 bankruptcies are often used to avoid foreclosure, stop car repossession, reduce loan debts, stop debt collectors from pursuing further action against you, and remove liens from your home.

Filing for bankruptcy can be a confusing situation and utilizing a bankruptcy lawyer can make things much easier on you during the process. One thing is certain about bankruptcies; they can certainly help ease a financial burden that is overwhelming.