Types of Personal Bankruptcy

According to the U.S. Constitution you can relieve all or part of your debts when you can no longer summon up the capability to pay your creditors and lenders in full. There are basically two different kinds of bankruptcy filings available to consumers, chapter 7 and chapter 13 bankruptcies.

Chapter 7 bankruptcy allows the consumer to dispense with a part of his debt or all of it, whereas

Under chapter 13 bankruptcy the debtor has to pay all or part of their debt based on a particular payment plan.

Chapter 7 Bankruptcy

Under the chapter 7 bankruptcy your liquid assets can be used to discharge a part or all of your debts. Liquid assets are those assets that can be quickly converted to cash such as money in the accounts, investments etc. Not all assets are allowed to be liquefied in order to pay the creditors. These assets are called exempt assets. Your state laws will dictate which assets are considered liquid non-exempt assets and which ones are exempt. Some of your liquid assets are also required to be turned over to the courts to be distributed among your creditors as partial payment of debt that you owe.

The non-exempt liquid assets have been distributed to the creditors as payment the remaining debt is discharged. You cannot be held liable for the remaining amount of debt and the creditors as well as third-party collection agencies use the right to attempt to collect these debts from you.

In order to qualify for chapter 7 bankruptcy you need to pass a means test proving that your income is less than the median income for your family size in your state. If you fail the means test you will not be allowed to file chapter 7 bankruptcy. Instead you can file chapter 13.

The laws governing bankruptcy filings state that in order to pass a means test you must also receive credit counseling from an approved credit counseling agency.

Chapter 13 Bankruptcy

A chapter 13 bankruptcy is typically easier to file since it involves a repayment plan. This repayment plan typically lasts from 3 to 5 years. When you file were chapter 13 bankruptcy you’re required submit a repayment plan to the court. You should begin making payments to the court according to the repayment plan even if your plan hasn’t yet been approved.

Usually after a few weeks there is a hearing to approve your payment plan. The creditors have a right to object to the payment amount but the judge has the final say. After your repayment plan has been approved by the court you’ll need to consume making payments to the court. Once the duration of your repayment plan is over your bankruptcy will be discharged and you cannot be held liable for any remaining amount of debt.

Why file a chapter 13 bankruptcy?

As mentioned before a chapter 7 bankruptcy requires that your liquid assets that are non-exempt under the state law be used to pay off your creditors. You should consider filing a chapter 13 bankruptcy instead if you have a secured debt like a car loan or a mortgage loan that you want to continue paying. Chapter 13 bankruptcy may be a better option if you want to keep certain assets which would be considered as non-exempt liquid assets under the chapter 7 bankruptcy. Furthermore if your income is above the median for your family size in your state you will not be able to file chapter 7 bankruptcy.

According to the U.S. Bankruptcy Code, to file chapter 13, you cannot have more than $992,975 in secured debt and $307,675 in unsecured debt.

Same as chapter 7 getting credit counseling from an approved credit counseling agency is mandatory of filing a chapter 13 bankruptcy.

Bankruptcy laws and filing is complex. It’s a good idea to always seek advice from a good attorney before filing for bankruptcy about the procedure, paperwork involved and which bankruptcy to file for.

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