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The Important Differences Between Chapter 7 and Chapter 13 Bankruptcy

Many people go through life just fine until they run into unfortunate circumstances. When people exhaust their emergency funds or run out of sources of income, bankruptcy is often their only (and best) option. It is important to remember that filing for bankruptcy isn't admitting defeat. Instead,  view this as an opportunity for a fresh start. In fact, few people wind up filing for bankruptcy simply due to reckless spending. Most file for reasons that are largely out of their control. Here are some of the reasons. 

Unfortunate Medical Expenses: Few people end up in the hospital by choice and even fewer people go to the hospital expecting to rack up medical bills. People who end up requiring an ICU stay or a surgical procedure have even more expenses. Those who exceed the lifetime limit on their insurance policies or who lack health insurance entirely could slip into bankruptcy.

Losing a Job: The large majority of Americans are only two words away from financial calamaty: "You're fired!" Almost everyone relies on a steady income to pay their bills on a monthly basis. Those who lose their job unexpectedly aren't prepared to handle so many expenses so quickly. Once people run through their liquidity fund, they start to slip into debt. This is where bankruptcy starts to seem like a viable option.

But which chapter of bankruptcy is right for you?

Whenever people file for bankruptcy, they are often faced with a decision regarding whether or not to file under Chapter 7 bankruptcy or Chapter 13 of the U.S. Bankruptcy Code. Understanding the differences between these two options and how they affect the outcome is a critical first step that a bankruptcy attorney can guide you through. 

An overview of Chapter 7 Bankruptcy

When people file for Chapter 7 bankruptcy, the applicant will typically have an opportunity for a discharge from their credit card and certain types of other consumer debts. While people may worry about losing their property, they should understand that the liquid assets might be taken away; however, most people will have any real-estate property spared from the process. Furthermore, people can even take advantage of Chapter 7 bankruptcy to slow down a possible foreclosure on their house. While it could temporarily halt a foreclosure process, people need to try and use the delay of a bankruptcy case to catch up on their mortgage payments. Once the case is resolved, the foreclosure process will continue.

Chapter 7 bankruptcy cases usually take a few months to finish. People with high levels of income may not be eligible. Those with low annual incomes probably will, unless they fail to meet certain criteria under the Bankruptcy Means Test instituted by Congress in 2005. This is a complicated court filing that people should seek legal advice for.

An overview of chapter 13 Bankruptcy

Chapter 13 bankruptcy has several notable changes from the Chapter 7 process. Those filing under Chapter 13 may not receive an immediate full discharge from their debts. Instead, the court is going to require the applicant to come up with something called a Chapter 13 repayment plan. This plan will specify how the person is going to repay their debts instead of receiving forgiveness for them. Because this repayment plan takes on the order of a few years, the Chapter 13 bankruptcy process will also take a few years to run its course. Anyone filing for Chapter 13 bankruptcy will need to have a steady job because a monthly income is essential for a successful repayment plan and a court approval.

Of course, this repayment plan comes with a lot of legal paperwork that people should seek the advice of legal counsel for.

Either chapter of bankruptcy will put an immediate stop to harrassing creditors' calls and legal actions in the works against you.

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