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Key differences between Chapter 7 and Chapter 13 bankruptcy

A lot of good people end up filing for bankruptcy. A job loss or illness is all it takes to put people in a pile of debt that they can't climb out of without some help.

Unfortunately, if you don't understand the practical differences between the types of bankruptcy plans available to consumers, you can end up hurting yourself financially for no reason. Here are key factors that anyone considering a bankruptcy should understand about the difference between a Chapter 7 bankruptcy versus a Chapter 13 plan.

1. Chapter 7 wipes out most or all of your debts at once.

Chapter 7 is what some people call "total" bankruptcy. Under the rules for this type of bankruptcy, you essentially ask the court to wipe out all of your debts. Student loans are generally not included (however, there are exceptions in the case of disabled individuals and a few other instances), but credit card debt, unsecured loans, utility debt and judgments are usually erased.

While it takes a few months to get through the process, it is nearly an immediate fresh start on your financial life. Yes, your credit takes a hit. However, it takes that hit all at one time instead of dragging it out for years. That makes it easier to rebuild.

2. Chapter 13 allows you to repay your debts -- but it may not be the best option.

A Chapter 13 bankruptcy puts you on a three to five year plan, during which your finances are controlled by the court. You make payments on your debts monthly during this time, with the goal being able to repay some or all of them.

Unless you have assets you are trying to protect from forfeiture -- and very few individual consumers do by the time they need to file bankruptcy -- it probably isn't the best choice. It subjects you to credit damage the entire time you are in bankruptcy.

In addition, you get no consideration from potential creditors for choosing this bankruptcy plan over Chapter 7 -- a fact that many consumers don't realize.

There's absolutely no better step you can take than consulting with a bankruptcy attorney before you decide what path you want to take. Chapter 13 can be beneficial only in certain circumstances -- otherwise it can be a trap for the unwary.

Source:, "Bankruptcy Basics: Chapter 7 vs. Chapter 13," accessed Feb. 23, 2018

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