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The differences between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | Jan 12, 2018 | Blog |

If you are living with unmanageable or overwhelming debt, there is hope for your future. Despite any associated stigmas, bankruptcy can be a meaningful solution that gives you and your family a needed fresh start without losing all your assets.

If you are considering filing bankruptcy, knowing what your options are and the necessary requirements can give you the confidence you need to make a smart decision for your path forward. For most people, the choice is between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7

Chapter 7 is known as the “liquidation chapter.” It involves the sale of nonexempt assets to pay creditor claims, which wipes out your debt for a “fresh start.” Certain debts cannot be discharged in a Chapter 7 bankruptcy, such as alimony payments, child support, fraudulent debts, certain taxes, student loans and others.

There are bankruptcy exemptions available to you, which allow you to keep your home and other property. Exemption limits apply to any equity you have on the property. To calculate equity, you take the value of the property and reduce what is owed. For example, if you own a car valued at $8,000 and owe $2,000 on the loan, the equity value of the car is $6,000.

To file Chapter 7 bankruptcy, you have to pass a means test if you are a higher income filer. These filers have an income that is above the median for your household size in Virginia. Those with an income below the median are exempt and may file for Chapter 7 without passing the test.

Chapter 13

Chapter 13 is typically best for those with a steady paycheck or other source of income, as this option allows you to reorganize debts into a single repayment plan.

This plan can last anywhere from three to five years, at which point the remainder of the debt is discharged and the court will issue an order prohibiting credits from further collection. Chapter 13 can be used to prevent a house foreclosure, make up missed payments on a car or mortgage, pay back taxes, halt interest from accruing on tax debt, keep nonexempt property and more.

Generally speaking, Chapter 7 is better for individuals who want to eliminate a heavy debt burden without the obligation of repayment, and Chapter 13 is usually best for those who have a lot of valuable nonexempt property they want to keep. However, either option could be the right choice for you depending on your unique situation.

For help determining how to file bankruptcy to best meet your needs, consider working with an experienced bankruptcy attorney who can review your finances and the available exemptions to identify the right choice for you. A financial problem can strike at any time for any reason, and you deserve to explore all of your options to be able to move forward.