Dissecting Chapter 7 and Chapter 13 bankruptcy

Economic times are getting better throughout the country. The worst of the recession is over, and even gas prices are going down. However, these are still difficult times for many Florida residents. Countless families are facing insurmountable debt, unemployment and home foreclosure, often through no fault of their own.

When other debt management options have failed, personal bankruptcy can be a way to get back on one's feet. A bankruptcy discharges or restructures several types of debt. Bankruptcy has given many people the relief they needed to start over and rebuild their credit from the ground up. However, there are different options for bankruptcy. What is ideal for one family may not be the best option for another. It's important to understand the main types of personal bankruptcy, as well as their advantages and limitations, before making a decision.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is often called the "fresh start" bankruptcy. This is because most debts can be completely wiped out during a Chapter 7, giving individuals a clean slate from which to start over. It is necessary to pass a means test to qualify for Chapter 7. According to the Administrative Offices of the U.S. Courts, non-exempt assets can be taken during a Chapter 7 and liquidated to repay creditors; the remaining debt can then be discharged. This type of bankruptcy is especially helpful for those with credit card debt or medical bills. Some types of debt cannot be discharged, and may include:

  • Federal student loans
  • Certain types of taxes
  • Child support or alimony
  • Debts resulting from criminal restitution

A home foreclosure is likely during a Chapter 7 bankruptcy, although the American Bankruptcy Association states that if there is no substantial equity and the debtor is able to keep up on mortgage payments, it may be possible to keep the home.

Chapter 13 bankruptcy

According to the U.S. Bankruptcy Court, Chapter 13 bankruptcy allows those with debt problems to repay them under a court-approved payment plan, usually lasting three to five years. Payments are made to a bankruptcy trustee who distributes the funds to creditors. After the repayment period, any remaining debt may be discharged, with certain exceptions. This type of bankruptcy may be ideal for Florida residents who have a regular income, especially if they make too much money to qualify for a Chapter 7 discharge.

Either type of bankruptcy will appear on a person's credit report for several years and can limit one's ability to be approved for new credit. These are just a couple of reasons why it's important to carefully consider all options before filing for bankruptcy. An experienced bankruptcy attorney can help you decide which option is best for your situation.

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