Saturday, June 27, 2009

How is Chapter 7 Bankruptcy Different From Chapter 13

By Chris A Smith

In the US there are essentially two ways to go through a personal bankruptcy. These two proceedings are known as Chapter 7 and Chapter 13 Bankruptcy and they are significantly different from each other.

Effective October 2005, Congress made sweeping changes to the bankruptcy laws that gave consumers more incentive to seek bankruptcy relief under Chapter 13 rather than Chapter 7. Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose through the Chapter 7 bankruptcy process. Basically in Chapter 13, the court can approve a payment plan that can run up to five years. This process lets you pay off today's debts with future earnings. Obviously you have to have a steady source of income to qualify for this filing.

Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. Exempt property may include automobiles, work-related tools, and basic household furnishings. Other property could be sold by a court appointed trustee or given directly to a creditor as payment of your debt. There is also a limitation of how much you can earn during this process. It is not designed for you to profit by not having to pay your debts.

There is another significant difference between Chapter 7 and 13. With Chapter 7, a person must wait eight years before they are able to file it again. Chapter 13 has only a two year waiting period before a person can refile.

While there are some similarities in the types of debt that can be discharged through either Chapter 7 or 13, there will be some differences as well depending on the state where you file. Most unsecred debt, garnishments, foreclosure notices and collection calls can be discharged through bankruptcy. However, child support, alimony, fines, certain taxes and student loans cannot.

Unless you have an acceptable plan to satisfy your debt under Chapter 13, the court usually will not allow you to keep property when the creditor has security lien on it. This could include your home as well as well as boats, vacation homes, recreational vehicles etc.

In the past, bankruptcies clogged the courts as they were easy to get. Today the law tries to slow that processdown by requiring all persons desiring to file bankruptcy, to attend a government appoved counseling course regarding personal finance and credit. This requirement was added in the hopes that the debt problemcould be resolved outside the court. In addition, persons wanting to file Chapter 7 now have to have the approval of the Court regarding their income. If the Court feels that an individual's income is too high, they will not let them walk away from the debt through liquidation.

The decision to file for bankruptcy can be a very emotional one and one that can cause a great deal of friction within a family. Don't make the stress greater by trying to do it yourself. Seek out a qualified bankruptcy attorney to guide you throught the process.

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