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

| Jan 6, 2016 | Chapter 7 |

In our last post, we spoke a bit about some of the options available to struggling debtors short of filing for bankruptcy. As we noted, it is important for debtors to consider all their options prior to moving ahead with bankruptcy, particularly because the financial consequences of bankruptcy—which are obviously great for burdened debtors, in some ways—can last for years afterward.

One of the benefits of working with an experienced bankruptcy attorney is having one’s case thoroughly evaluated to determine whether bankruptcy is a valid possibility and a wise decision. The answer depends on various factors, especially the debtor’s current income, expenses, and total debts. If it appears, upon evaluation, that bankruptcy would be a real possibility for a debtor, the next question is: what type of bankruptcy? 

In terms of personal bankruptcy options, the two forms of bankruptcy debtors have at their disposal are Chapter 7 and Chapter 13 bankruptcy. Both types of bankruptcy have distinct goals and it is important for debtors to be aware of the differences before making a decision. The general approach taken in Chapter 7 bankruptcy is that of liquidation: non-exempt assets are sold and the proceeds are used to pay back creditors. By contrast, the general approach in Chapter 13 bankruptcy is reorganization: the court determines the debtor’s disposable income and comes up with a three or five year repayment plan.

Not all struggling debtors for whom bankruptcy becomes a possibility are going to qualify for a Chapter 7 filing. In our next post, we’ll take a look at Chapter 7 eligibility and the topic of bankruptcy exemptions. 

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