The differences between Chapter 7 and Chapter 13 bankruptcy

People find themselves struggling with debt for all kinds of reasons. Maybe they wound up unexpectedly divorced which depleted their financial resources and savings while simultaneously creating an obligation to pay child support. Maybe they got hurt on the job or in a car crash and can't go back to work yet. Severe illnesses like cancer can also lead to individuals accruing huge amounts of medical debt.

Sometimes, debt slowly builds over time, as people charge a little bit to credit cards every month that they simply can't pay off in full. Regardless of how you found yourself struggling with debt, for many people, bankruptcy is the most effective solution. Unlike payday loans or debt consolidation programs, bankruptcy gets rid of the underlying debt that directly causes your financial hardship instead of simply pushing the repayment date out or slightly reducing the interest rate you pay.

Depending on your circumstances, there are different forms of bankruptcy that may work for you. The two forms most commonly used are Chapter 7 and Chapter 13 bankruptcy. Familiarizing yourself with the difference between them can help you decide which form works better for you.

Chapter 7 bankruptcy is also known as liquidation bankruptcy

In Chapter 7 bankruptcy, an individual seeks the discharge of their debts and claims a complete and total inability to repay those amounts. Due to the potential for abuse of such a generous system, there are strict limitations in place regarding who can qualify for Chapter 7 bankruptcy.

An individual who wants to file Chapter 7 bankruptcy will need to first pass a state means test. This test involves comparing their adjusted income to the state median income. Those whose income is at or below the state median level may qualify for Chapter 7 proceedings.

Some of their assets, including vehicles, real estate and other valuable possessions, may wind up liquidated or sold by the courts as a means of repaying creditors prior to their discharge. Chapter 7 bankruptcy stays on your credit report for a full 10 years after you receive your discharge.

Chapter 13 bankruptcy involves repayment before discharge

Those who have too many assets or income that is too high to qualify for Chapter 7 bankruptcy can still discharge their unsecured debts under a Chapter 13 filing. Unlike Chapter 7 bankruptcy, Chapter 13 does not involve the quick discharge of debts. Instead, the person filing will need to commit to a repayment period that usually lasts three years.

There will be a meeting of creditors, after which the courts will facilitate the repayment plan. The individual filing will send one payment directly to the courts each month to be distributed to their various creditors instead of making payments to each creditor individually. Provided that the individual adheres to the repayment plan, at the end of the time, they will receive a discharge of the remaining outstanding debts.

Chapter 13 bankruptcy proceedings will stay on your credit report for seven years after discharge. When you consider the fact that there is a three-year repayment period as well, the impact on your credit will last approximately the same amount of time for both forms of bankruptcy.

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