In financial management, bankruptcy can be a daunting but necessary option for individuals and businesses facing overwhelming debt. If you’re considering bankruptcy, it’s crucial to understand the key distinctions between Chapter 7 and 13 bankruptcy.
Breaking down these two common types of bankruptcy helps you decide which one may be right for your unique financial situation.
The liquidation option
Chapter 7 bankruptcy, alias “liquidation bankruptcy,” is a legal process allowing individuals and businesses to eliminate most of their unsecured debts. Unsecured debts include:
- Credit card balances
- Medical bills
- Personal loans
Upon filing for Chapter 7 bankruptcy, an automatic stay is put in place. This legal injunction prevents creditors from wage garnishment or foreclosure.
Your bankruptcy trustee will identify and liquidate (sell) any non-exempt assets to repay your creditors. However, many people can keep essential assets like their home, car and personal belongings through exemptions provided by state and federal laws.
The repayment plan
Chapter 13 bankruptcy, alias “reorganization bankruptcy,” allows individuals with a regular income to create a structured repayment plan to pay off their debts over a specified period.
You get the liberty to create a repayment plan that outlines how you will pay back your creditors. Similar to Chapter 7, filing for Chapter 13 triggers an automatic stay, helping protect you from creditor actions.
You will make regular payments that will be distributed the funds to your creditors according to the approved plan. Once you complete your repayment plan, any remaining qualifying unsecured debts are discharged.
Remember that bankruptcy is a legal tool designed to offer financial relief and a fresh start for those in need. And if you’re struggling to choose between Chapter 7 and Chapter 13, you should consider enlisting legal counsel.