Bankruptcy

Which Type Of Bankruptcy Is Better – Chapter 7 Or Chapter 13?

Whether it is chapter 7 or chapter 13, it is very important for you to understand that when a court declares you as bankrupt, it is going to affect your financial life for the next seven to ten years. Regardless of the specific chapter you file your bankruptcy petition under, your credit score will be seriously damaged. Though you will be able to get some relief from debts, you will have to work very hard to bring your finances back on track. You are strongly recommended to choose bankruptcy only as a last option, when no better alternatives are available out there.

The New Bankruptcy Rules

It is also important to note that the bankruptcy laws in the United States of America have significantly changed from what they were a few years ago. Since the introduction of the new bankruptcy rules in October 2005, it has become mandatory for the debtor to first go through a Means Test and an official credit counseling session in order to decide whether they are eligible to file under chapter 7 or chapter 13. The petition will have to be filed on the basis of the reports of the means test and credit counseling. If your monthly income is more than the median income of the state you are living in and the credit counselor also certifies it, you will have no other option but to file under chapter 13. On the other hand, if your regular monthly income after deducting your regular monthly expenses is lower than the median income of your state and the credit counselor also certifies it, you will have to file your petition under chapter 7. It means it is not a matter of choice. It is not up to you to decide which chapter you should file your petition under. Following is a brief rundown on what you can expect under chapter 7 and chapter 13 bankruptcy.

Discharge Of Debts

Whether you file your bankruptcy petition under chapter 7 or chapter 13, in either case, you will get some debt relief. In case of chapter, most of your debts will be discharged, except a few ones (such as student loans, IRS tax dues, and others). But, chapter 7 bankruptcy also includes liquidation of majority of your assets but you get certain property exemptions either under federal laws or under state laws. But, eve property exemptions are allowed only up to a certain extent, which in most cases, is not sufficient enough to allow you to keep your assets. For example, if you have $6000 of equity in your motor vehicle but the exemption limit for it is only $2000, the bankruptcy trustee will sell off that vehicle and then pay $2000 to you in cash from the proceeds thus received; the remaining amount will be used to settle your dischargeable debts. On the other hand, chapter 13 does not allow any discharge of debts and it does not also require any liquidation of assets. The court instead allows you to keep all your assets and properties and to continue with your business while providing you an opportunity to pay off your debts as per a new repayment plan, designed specifically to suit your financial position.

As mentioned in the first paragraph, whether it is chapter 7 or chapter 13, bankruptcy in either case will have adverse effects on your credit score. Therefore, you are advised to make a final decision in this regard with the help of an experienced bankruptcy attorney.


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