Which Is Better - Chapter 7 Or Chapter 13 Bankruptcy
June 26, 2008 – 10:05 amFor anyone that has financial difficulties, one option is to file for bankruptcy. You should never enter into this lightly, but if you do decide that this is the best option then learn as much as you can beforehand. This article will cover the two options open to someone filing for personal bankruptcy. These are chapter 7 and chapter 13 bankruptcy. It will compare chapter 7 versus chapter 13 bankruptcy.
Chapter 7 bankruptcy is effectively the liquidation of your assets to pay off all outstanding debts. If you are eligible for chapter 7 bankruptcy, the court effectively liquidates your assets and distributes the money to your creditors. This clears your debts and you can start again. Most people go for this option.
Filing a liquidation bankruptcy may seem like a last resort (and it should be) but you will not be left high and dry by the courts. The idea of the bankruptcy is to arrive at an equitable solution for both creditors nd debtors. So your essential assets, like your home and car are generally exempt from liquidation. This ensures that you can still contribute to the community and get back on your feet quickly.
Having said this, chapter 7 bankruptcy has come under heavy scrutiny of late because of the rise in bankruptcies and the widespread abuse of the law. In October 2005, the law was changed to make it stricter.
Based on the changes, certain means tests have to be passed before a person can file for Chapter 7 bankruptcy. A persons income must be below the median income for the state in which they are a resident. Also, a person cannot have assets that can cover at least twenty-five percent of their debt.
There are allowances for exceptions to the new ruling, so that people in unusual circumstances are not unfairly disadvantaged by the changes. For instance, the people that suffered during Hurricane Katrina were given special considerations allowing them to start again after flooding had destroyed their homes.
Chapter 13 is a little different. You are not liquidating your assets but asking the court to restructure the way you pay off your debts. You will still pay off the debts but you may be given more time to meet this commitment. You may also get relief from creditors calling you. The end result is that you pay off the debts but keep your personal belongings.
Assets are not liquidated but the debt is not cleared as in a chapter 7 bankruptcy. The courts look at your financial situation and work out a reasonable schedule for you to pay back your creditors.
The changes to the bankruptcy laws have affected how chapter 13 is processed too. Before the changes the court would decide what debts had to be paid and come to an equitable arrangement. They would take into account your essential items before working out a debt repayment schedule, including things like rent/mortgage, groceries, and utility bills. Under the new law, the IRS has developed a formula that makes this determination.
In summary, chapter 7 is a way to clear your debts and start a fresh. Chapter 13 is a way to pay off your debts in a more manageable fashion. Both have there advantages depending on your financial situation and whether you fit the criteria.
Tags: Bankruptcy
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