Chapter 13 Vs Chapter 7 Bankruptcy

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 7 versus chapter 13 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 like a desperate option but the courts ensure that you will not be made destitute. Certain assets are exempt from bankruptcy. These items are the things you need to continue to be a productive member of the community. So your home and car are often exempt. However the interpretations of the law vary for each state so the criteria for exemption may vary.

Having said this, chapter 7 bankruptcy has come under heavy scrutiny of late because of the rise in bankruptcies and the widespread abuse of the law. In October 2005, the law was changed to make it stricter.

Based on the changes, certain means tests have to be passed before a person can file for Chapter 7 bankruptcy. A persons 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.

The laws still have some flexibility in them to make allowances for people that have had particularly bad luck or been the victim of freakish events. An example of this was the people that suffered after Hurricane Katrina hit. Many had flooded homes and lost most of their assets. They were allowed to file chapter 7 if they wanted to.

Chapter 13 is a little different. You are not liquidating your assets but asking the court to restructure the way you pay off your debts. You will still pay off the debts but you may be given more time to meet this commitment. You may also get relief from creditors calling you. The end result is that you pay off the debts but keep your personal belongings.

In this form of bankruptcy you do not lose your assets but still have to pay off all your debts. The aim of taking the process to court to get relief from creditors and to make the payment schedule more equitable for you and the 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 IRS has developed a formula that makes this determination.

In summary, chapter 7 is a way to clear your debts and start a fresh. Chapter 13 is a way to pay off your debts in a more manageable fashion. Both have there advantages depending on your financial situation and whether you fit the criteria.

Article by: AdrianFletcher | Total views: 18 | Word Count: 547

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Get detailed information on the bankruptcy laws, including more on chapter 7 bankruptcy laws and other ways to solve your debt problems at http://www.bankruptcyfixup.com