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Understanding Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 bankruptcy also known as liquidation bankruptcy is the simplest and quickest of all bankruptcy types. In this, a bankruptcy trustee is appointed who liquidates the property so as to pay the creditors. This liquidation of non-exempt assets will discharge all or most of your debts. On the other hand, Chapter 13 bankruptcy will let you keep all your property and requires some or all of your debt to be paid over a period of 3-5 years. These payments are made from your disposable income which is the remaining income after covering necessary expenses like food, shelter, etc.

To be eligible for Chapter 7 bankruptcy, the “means test” must be cleared. If your average income for six months prior to filing bankruptcy happened to be lower than the median income of your state, you will be eligible for bankruptcy under Chapter 7. For Chapter 13 bankruptcy, there is no means test however there is a debt limit which should not be more than $383,175 for unsecured debts and $1,149,525 for secured debts.

Most of the debts before filing of Chapter 7 bankruptcy are discharged with exception of student’s loan, child support & alimony obligations and some important taxes. Liability of the petitioner to creditors ends after the completion of the bankruptcy process with a court-entered discharge order. In the case of Chapter 13 bankruptcy, all or a part of the entire debt is paid off over a definite period of time under a specific repayment plan that defines how much to be paid every month. At the end of this repayment plan, the liability of the petitioner to creditors ends with a court-entered discharge order.

It must be noted that both individuals as well as business entities can file for the Chapter 7 bankruptcy. However, under Chapter 13 bankruptcy, only individuals including sole proprietors are eligible for filing bankruptcy and business entities cannot file this type of bankruptcy.

In most cases, filing for Chapter 13 bankruptcy will permanently stop the foreclosure proceedings with an automatic stay order. This stay order will hold off the foreclosure proceedings temporarily until the court approves a repayment plan for the debtor and appoints a bankruptcy trustee. The debtor will then make agreed monthly payments to the bankruptcy trustee who in turn pays the creditor on debtor’s behalf.

In the case of Chapter 7 bankruptcy, it’s highly unlikely that the debtor would be able to keep his/her home if timely mortgage payments were not made. Courts generally tend to grant a lender’s request to lift an automatic stay order so that foreclosure proceedings can be continued.

You must file for a Chapter 7 bankruptcy if you couldn’t pay your debt with a repayment plan though you first need to pass the means test. Under Chapter 7 bankruptcy, you will get quick relief from your creditors as these proceedings may end in 3-5 months. On the other hand, Chapter 13 bankruptcy usually takes around 3 to 5 years for the completion of the repayment plan. Also, if all or most of your debt is dischargeable then Chapter 7 bankruptcy provides a better option.

To see more http://www.busby-lee.com/chapter13v.html

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