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What are the differences between Chapter 7 and Chapter 13?

With your mortgage payment, car payment, credit card payments, utilities and other monthly bills, you may not make enough money to cover them all.

You may be thinking about filing bankruptcy as a last resort, but you are unclear about the differences between Chapter 7 and Chapter 13. With this knowledge, you can make a decision as to which is better in your specific debt situation.

Chapter 7

Nearly 71 percent of the people who file bankruptcy file under Chapter 7. This is the simplest bankruptcy and gives you a fresh financial start in a reasonably short time. You must, however, meet income requirements in order to file for Chapter 7. 

One of the biggest advantages of a Chapter 7 is that it discharges virtually all of your consumer debt, including your credit card debt. In addition, Chapter 7’s automatic stay stops your creditors from harassing you by phone, email or otherwise for payment of their bills. The other major advantage is that you do not lose everything. Much of your property is exempt, such as the equity value in your home in most situations.

A major downside to Chapter 7, however, is that you may not be able to save your home from foreclosure. Chapter 7 allows you to forestall foreclosure proceedings that your lender has begun against you, but does not wipe out your mortgage balance. It gives you time to possibly get caught up on your mortgage payments, but if you cannot do that, your lender can restart the foreclosure proceedings.

Chapter 13

The major difference between Chapter 7 and Chapter 13 is that the latter is a reorganization effort. If you file for Chapter 13, you must come up with a plan, usually of from three to five years’ duration, whereby you continue to pay your debts.

You do, however, have the possibility of renegotiating debts to reduce their current outstanding balances, especially if you are “upside down” where your home and/or your car(s) are worth less than you still owe on them. You also may be able to reduce your monthly payments on other debts. Your bankruptcy trustee helps you construct the plan and the judge must approve it before it can go into effect.

Chapter 13 has the same automatic stay provision as Chapter 7 that stops your creditors from harassing you while you are developing your plan. The whole purpose of a Chapter 13 is to give you the time you need to catch up on debt payments and get back on your financial feet. 

Again, if you are thinking about bankruptcy, your best strategy is to talk with an experienced, knowledgeable bankruptcy attorney. 

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