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Most people have heard of the two main types of consumer bankruptcy: Chapter 7 and Chapter 13. What’s the difference between them and which one could be the best option for you?
Overview of Two Popular Bankruptcy Types
The most common type of bankrupty is Chapter 7 and is available to consumers and businesses. It’s also called straight bankruptcy.
Nonexempt assets, or assets that can be sold to pay off debts, are turned over to a trustee who pays creditors with the proceeds. After filing, creditors aren’t allowed to collect funds directly from you. When the assets have been liquidated and creditors have been paid, the rest of your debts are canceled and you’re no longer responsible for them.
You can’t discharge these debts under Chapter 7:
- Alimony and child support
- Drunk driving judgments and criminal fines or restitution
- Debts incurred by fraud or intentional wrongdoing
- Back taxes under 3 years old and student loans
- Recent purchases involving substantial amounts
- Properly executed contracts involving titles or liens such as land or automobiles
Chapter 13 reorganizes your debt into a manageable debt repayment schedule over three to five years. You’ll “reaffirm,” or repay from 10-100% of what you owe depending on your income, the nature of your debt and how much you owe.
These debts can’t be discharged under Chapter 13:
- Alimony and child support
- Drunk driving judgments and criminal fines
- Student loans
Reasons for Choosing Chapter 7
You should consider selecting a Chapter 7 bankruptcy if the following reasons apply:
- You have no hope of repaying any debts
- You have debts without co-signers
- You’re about to be sued by creditors
- You’ll protect your exempt property and income
- You don’t qualify for Chapter 13
Reasons for Choosing Chapter 13
Consider Chapter 13 bankruptcy for these reasons:
- You’ve already filed Chapter 7 in the past six years
- You have debts with cosigners
- You can pay your debts within three to five years
- Your income may disqualify you from Chapter 7
- You need relief from collection proceedings or you want to pay your creditors and need some breathing room
- You wish to leave open the option of filing a Chapter 7 bankruptcy some time in the future
- You’re behind on your mortgage and own back taxes You have assets that could be liquidated if you file Chapter 7
- You’re a farmer who has debt not related fo your farming operations and don’t qualify for Chapter 12
Questions for Your Attorney
- In a Chapter 7 bankruptcy, will all of my assets be liquidated?
- Will my back taxes be discharged in a Chapter 7 bankruptcy?
- Can I file a Chapter 13 bankruptcy if I have debts with cosigners?
- What are nonexempt assets?