The U.S. Bankruptcy Code offers two types of bankruptcy for individuals in financial distress: Chapter 7 and Chapter 13. Understanding the differences between these two options is critical for individuals who are considering filing for bankruptcy.
Chapter 7: Liquidation Bankruptcy Chapter 7 bankruptcy is also known as a "liquidation" bankruptcy because it involves the sale of a debtor's non-exempt assets to pay off creditors. The process typically takes around 4-6 months to complete and is available to individuals, married couples, and businesses.
Chapter 7 bankruptcy discharges most unsecured debts, such as credit card debt and medical bills. This means the debtor is no longer responsible for paying them. However, some assets, such as a primary residence, may be protected from being sold under certain exemptions.
To qualify for Chapter 7, individuals must pass a means test, which assesses their income and expenses to determine if they have enough disposable income to pay off their debt through a Chapter 13 bankruptcy.
Chapter 13: Reorganization Bankruptcy Chapter 13 bankruptcy, on the other hand, is referred to as a "reorganization" bankruptcy because it involves a payment plan in which a debtor repays a portion of their debt for 3-5 years. This option is typically available only to individuals, not businesses.
In a case under Chapter 13, the debtor can keep all their assets and make regular payments to a bankruptcy trustee, who then distributes the funds to creditors. Chapter 13 is often a good option for individuals who don't qualify for Chapter 7 or who want to keep certain assets, such as their home, that would be sold in a Chapter 7 bankruptcy.
Debtors must have a regular income and have debt that falls within certain limits to be eligible for Chapter 13. It's important to note that while Chapter 13 allows individuals to keep their assets, they must still make regular payments to the bankruptcy trustee for several years.
Choosing between Chapter 7 and Chapter 13? The choice between a Chapter 7 and Chapter 13 bankruptcy depends on several factors, including a person's income, assets, and debt type. An experienced bankruptcy attorney can help individuals evaluate their options and determine which type of bankruptcy suits their unique situation.
For example, regular-income individuals who wish to keep their assets may be better suited for Chapter 13. In contrast, those with little to no disposable income may prefer Chapter 7. Additionally, individuals with significant unsecured debt, such as credit card debt, may find that Chapter 7 is a better option. In contrast, those with primarily secured debt, such as a mortgage, may benefit from Chapter 13.
In conclusion, it's important for individuals considering bankruptcy filing to understand the differences between Chapter 7 and Chapter 13. By working with an experienced bankruptcy attorney, individuals can determine which type of bankruptcy is best for their unique financial situation and take the necessary steps to get back on solid financial footing.
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