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How do Chapter 7 and Chapter 11 bankruptcy differ?

On Behalf of | May 11, 2020 | Bankruptcy

The choice of whether or not to file for bankruptcy is a major decision that shouldn’t be taken lightly. However, when you’ve exhausted all other options for repaying your debts, filing for bankruptcy can provide you with the fresh start you need to get back on your feet.

Many people are already familiar with the concept of bankruptcy but are unaware that different chapters of bankruptcy allow a person to relieve their debt in different ways. Depending on your unique circumstances and income level, you will likely file for either Chapter 7 or Chapter 13 bankruptcy.

Understanding Chapter 7

The most common type of bankruptcy filed in the U.S. is Chapter 7 bankruptcy – also known as liquidation bankruptcy. In this type of bankruptcy, the court will sell your non-exempt property and assets to pay off creditors as much as possible. After this, the court discharges all debt.

State laws will dictate which assets are exempt from being sold, which in some cases may include your home or car. However, it will depend on your circumstances. Individuals will also have to pass an income means test to determine if they are eligible. For this reason, the individuals who file for Chapter 7 bankruptcy generally have little to no disposable income and own little to no property.

Understanding Chapter 13

If you have property you wish to keep, Chapter 13 bankruptcy may be the option for you. Also referred to as reorganization bankruptcy, Chapter 13 bankruptcy reorganizes your debt into a three to five-year repayment plan. Once you have completed the plan, the court will discharge any remaining debt you owe.

Chapter 13 isn’t for everyone, however. To qualify for Chapter 13 bankruptcy, your secured and unsecured debt must not exceed a specific amount. But if you wish to hang on to property that may not be exempt in Chapter 7 bankruptcy – like your house or car – Chapter 13 will allow you to do so.

The bottom line

Filing for bankruptcy is a huge undertaking, but one that can provide some much-needed relief from debt. The type of bankruptcy that is right for you is dependent on a variety of factors. If you are unable to repay your debts, speaking to an attorney can help you decide which form of bankruptcy will work for you.