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Chapter 13 versus Chapter 7: Different types of consumer bankruptcy

Bankruptcy helps individuals as well as other types of legal entities manage and escape burdensome debt. There are several types of bankruptcies under the United States Code. The two most common types of bankruptcy for consumers are Chapter 7 and Chapter 13.

Which chapter is right for you? The answer depends on a variety of factors, and an experienced bankruptcy attorney is the best resource for helping you determine which chapter makes the most sense for you.

Chapter 7 provides a relatively quick fresh start, while Chapter 13 helps protect one's assets.

Approximately 70% of all the bankruptcies filed around the United States each year are Chapter 7s, so it is the chapter most people think of when they hear the word "bankruptcy." In a Chapter 7, an independent bankruptcy trustee is appointed to determine whether any of the debtor's possessions ought to be liquidated, i.e., sold, and the proceeds generated from that liquidation paid to creditors. But only in a small minority of Chapter 7 cases--approximately 5%--are assets in fact sold to pay creditors. The reason such a small percentage of filers lose assets to trustee liquidation is that the only possessions attractive to a bankruptcy trustee are ones that are not fully encumbered by liens, i.e., have significant equity, are not leased, are not protected from liquidation under state law, are not so burdensome that liquidation becomes cost ineffective. The assets most people who file bankruptcy own are either already fully encumbered, leased, exempt from liquidation under state law, or are indeed deemed too burdensome to liquidate. Accordingly, Chapter 7 is typically the ideal chapter for people who do not have substantial nonexempt equity in their possessions, and have substantial debt--not debts that can't generally be discharged, such as most taxes, student loans, and debts that arose out of a marital dissolution--but generally dischargeable debt, such as credit cards, medical debts, debts to landlords, and debts that arose out of a foreclosure or repossession.

In a Chapter 13 bankruptcy, on the other hand, the debtor is proposing to repay his creditors, at least in part but perhaps in full, over a period of thirty-six to sixty months. The primary reasons one would consider filing Chapter 13 and not Chapter 7 are: 1) substantial equity in their possessions such that a Chapter 7 trustee, if the debtor were to file Chapter 7, would indeed liquidate one or more of those assets to pay the claims of creditors, 2) to force a mortgage lender who would otherwise soon foreclose into accepting a cure of the arrearages over the three to five year repayment period while current mortgage payments resume, 3) in some cases, to discharge and remove a junior mortgage against real estate, 4) to force taxing agencies, whose debts are generally nondischargeable in bankruptcy, into accepting a cure of the arrearages over the three to five year repayment period, and 5) income so high that the debtor can afford to repay his creditors at least in part and therefore does not make a viable Chapter 7 candidate.

Ask a bankruptcy attorney about which chapter may be right for you.

If you are struggling with debt, you have options. Chapter 7 or Chapter 13 may well help you get a fresh start, free of burdensome debt. But you need to take the first step.

Get in touch with a bankruptcy attorney to find out if you could benefit from bankruptcy. Learning about your options as early in the process and being able to plan ahead is always--100% of the time--to your advantage. Don't wait until the last minute!

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