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Chapter 7 vs Chapter 13 Bankruptcy

When you are considering filing for bankruptcy, it is important that you know the difference between chapter 7 vs chapter 13 bankruptcy.  Each has its advantages and disadvantages and each has its requirements for qualification.  A person may qualify for one and not for the other, and in some rare cases a person may not qualify for chapter 7 or chapter 13 bankruptcy.

Chapter 7 bankruptcy (liquidation) is typically the bankruptcy that most people have in mind and is usually the right choice.  It has the power to discharge nearly all your debt (with some exceptions) and it also has the power to take your property if it is not protected by a bankruptcy exemption.  Qualification for chapter 7 bankruptcy is determined by the Means Test.  The Means Test is mostly determined by comparing your income in relation to your state’s median income.  If your income is less than your state’s median income you automatically qualify, if your income is more certain expenses can be taken into account and still help you qualify.  If your income qualifies you for Chapter 7 bankruptcy and you don’t own any significant assets, then Chapter 7 bankruptcy is probably the right option for you.

Most people do not have a clear understanding of chapter 13 bankruptcy (reorganization).  Most people end up filing for Chapter 13 bankruptcy because their income is too high to qualify for Chapter 7 bankruptcy or because they would lose property (i.e., car, house) if they filed for Chapter 7 bankruptcy.  Chapter 13 bankruptcy places a person into a repayment plan of 3 or 5 years.  The repayment terms is based upon income and/or the amount of unexempt assets you have.  Some people have payment plans of less than $100 a month.  The repayment period is three years if your income is less than the state’s median income and five years if your income is more than the state’s median income.  Chapter 13 bankruptcy can help you catch up with arrearages on your mortgage and in some cases it can discharge the second mortgage you have on your home, just like credit card debt.  Moreover, in Chapter 13 bankruptcy a person will usually not face the prospect of losing any property.  Qualification for Chapter 13 is mostly determined by the debt limits on secured ($1,081,400.00) and unsecured debt ($360,475.00).

Chapter 7 and Chapter 13 bankruptcy each has its distinct advantages and disadvantages.  And a consultation with an experienced bankruptcy attorney is required to know which would be correct in any given situation.

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