Chapter 13 Vs Chapter 7 Bankruptcy

By: Adrian Fletcher

If you have large debts or other financial difficulties, a way to resolve the situation is to file for bankruptcy. There are two types of bankruptcy open to individuals - chapter 7 and chapter 13. This article will cover the basics of each and compare chapter 7 versus chapter 13 bankruptcy.

Chapter 7 bankruptcy is effectively the liquidation of your assets to pay off all outstanding debts. If you are eligible for chapter 7 bankruptcy, the court effectively liquidates your assets and distributes the money to your creditors. This clears your debts and you can start again. Most people go for this option.

Filing a liquidation bankruptcy may seem like a last resort (and it should be) but you will not be left high and dry by the courts. The idea of the bankruptcy is to arrive at an equitable solution for both creditors nd debtors. So your essential assets, like your home and car are generally exempt from liquidation. This ensures that you can still contribute to the community and get back on your feet quickly.

With this said, a chapter 7 bankruptcy is not as easy to take as it has been in the past. A general increase in bankruptcies and cases where the laws have been flouted have resulted in changes to the statutes. In October 2005, the chapter 7 laws were changed.

Based on the changes, certain means tests have to be passed before a person can file for Chapter 7 bankruptcy. A persons income must be below the median income for the state in which they are a resident. Also, a person cannot have assets that can cover at least twenty-five percent of their 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 bankruptcy is also known as a repayment bankruptcy. Essentially, you are going to court to renegotiate the terms under which you repay your debts. This generally means restructuring the time frame in which you make the repayments but you may be able to renegotiate the amount of debt too in some cases.

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 laws have affected how chapter 13 is processed too. Before the changes the court would decide what debts had to be paid and come to an equitable arrangement. They would take into account your essential items before working out a debt repayment schedule, including things like rent/mortgage, groceries, and utility bills. Under the new law, the IRS has developed a formula that makes this determination.

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.