Chapter 13 Vs Chapter 7 Bankruptcy
Posted on June 25, 2008
Filed Under Debt Consolidation, Avoid Bankruptcy, Business Bankruptcy, Chapert 11, Chapter 13, Blog Carnivals |
If you have had financial problems recently, you may be considering bankruptcy as a way to resolve the situation. In terms of personal bankruptcy there are two options open to you. These are chapter 7 and chapter 13 bankruptcy. This article will discuss the merits of each and contrast chapter 13 vs chapter 7 bankruptcy.
Chapter 7 bankruptcy is also known as a liquidation bankruptcy. Most people seek this option. When a person files for bankruptcy under Chapter 7, certain assets are liquidated and the money obtained is paid to the various creditors. The courts decide on an equitable agreement in terms of what is paid to creditors.
A liquidation bankruptcy may seem drastic (and it is) but it does not mean that you will be out on the street with nothing but the clothes you are wearing. Certain assets are exempt from chapter 7 bankruptcy. These are essential assets. So things like your house and car will not be liquidated. Each state has different interpretations and criteria for what is deemed to be exempt so it makes sense to get current advice on such issues.
Having said this, a liquidation or chapter 7 bankruptcy is not as straightforward as it used to be. The rise in bankruptcy claims and instances where people were abusing chapter 7 prompted some changes to the laws. 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 person’s 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.
Assets are not liquidated but the debt is not cleared as in a chapter 7 bankruptcy. The courts look at your financial situation and work out a reasonable schedule for you to pay back your 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 Internal Revenue Service (IRS) has developed a formula that makes this determination.
In short, chapter 7 liquidates your assets but clears you debts. Chapter 13 renegotiates the way you pay off your debts but you will not lose any of your assets and will stop receiving calls from creditors. Both have there place depending on your circumstances and whether you are eligible.
Get detailed information on the bankruptcy laws, including more about chapter 7 bankruptcy code and other ways to solve your debt problems at http://www.bankruptcyfixup.com
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