Bankruptcy: Chapter 7 Vs Chapter 13

Bankruptcy is a legal process which helps you to manage your debts effectively under the cover of the bankruptcy court and helps you to make a fresh start on your finances. Once you file bankruptcy, all foreclosures, repossession and garnishment orders cease to operate temporarily. Generally, there are two types of bankruptcies which are filed by individuals. They are Chapter 7 bankruptcy and Chapter 13 bankruptcy. However, if you have a discharged Chapter 7 bankruptcy within the last 8 years or a discharged Chapter 13 bankruptcy within the last 6 years you cannot file bankruptcy. Moreover, you cannot file bankruptcy if your bankruptcy petition has been dismissed within the last 180 days.

Under the new bankruptcy law of 2005, you need to go through a credit counseling program if you want to file bankruptcy and submit a certificate to the bankruptcy court in this regard within a period of 15 days of filing bankruptcy. The bankruptcy court may dismiss your bankruptcy petition if it is proved that you have illegally transferred your property to your friends and relatives and have tried to conceal your assets to qualify yourself for Chapter 7 bankruptcy. Moreover, if before filing bankruptcy if make excessive spending on your credit cards with the hope that these credit card debts will be included under Chapter 7 and you need not pay them off, then your bankruptcy petition may be dismissed.

Chapter 7 bankruptcy, also known as “straight” or “liquidation” bankruptcy is preferred by most debtors because under this bankruptcy, the Bankruptcy court discharges all the debts. A portion of your property may be sold off by the Bankruptcy Court under Chapter 7 to pay off some of your outstanding debts. Some of the properties which can be sold under Chapter 7 include expensive musical instruments, cash and other investments, a second car or home, and collection of stamps and other valuable items. Hence a debtor can file Chapter 7 bankruptcy if he has nothing to lose to the bankruptcy court. The debtor can also eliminate some of his secured debts by filing bankruptcy under Chapter 7.

Under Chapter 13 bankruptcy, you need to pay back the outstanding debts to the creditors under the cover of the bankruptcy court through a repayment plan and so Chapter 13 bankruptcy is also known as “debt adjustment” bankruptcy. Instead of handing over the assets as in the case of Chapter 7, you need to pay off the debt within 3 to 5 years.

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