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Chapter 7 vs. Chapter 13: What's the Difference?

Making the decision to file for bankruptcy is hard enough — knowing which bankruptcy method is right your financial situation can be even harder if you are unfamiliar with how the process works.

While Chapter 7 and Chapter 13 are both avenues to achieve debt relief, they each have specific criteria that can determine the best one for your financial situation. Here are the differences:

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as liquidation or straight bankruptcy, can give individuals a fresh start by eliminating unsecured debts without having to pay them back.

Some examples of unsecured debt are:

  • Credit cards
  • Medical debt
  • Back utility bills
  • Payday loans
  • Personal loans
  • Broken cell phone contracts
  • Past car repo deficiencies

Here’s what Chapter 7 can do for the following financial situations:

  • Garnishments - Chapter 7 bankruptcy will stop wage garnishments from most creditors (not child support).
  • Foreclosures - While filing for Chapter 7 is not a permanent fix to foreclosure, it can stop the proceedings for a few months. If losing your home is a concern, you may want to consider Chapter 13 bankruptcy instead.
  • Credit Card Debt - Filing for Chapter 7 bankruptcy can eliminate your credit card debt. There are some exceptions. For example, if you purchase any luxury goods or services within 90 days of filing for bankruptcy. This situation would be considered non-dischargeable.

Benefits of Chapter 7

  • No more harassing calls from creditors
  • Fairly Quick Process - Your bankruptcy case can be completed within just a few months of filing. Enjoy a fresh start!

Who is eligible?

Individuals must pass the bankruptcy Means Test. The means test determines who can file for debt forgiveness through Chapter 7 bankruptcy. You will be asked to provide your current monthly income and expenses. If you fail the means test and do not meet the requirements to file for Chapter 7 bankruptcy, then Chapter 13 may be the best option for you.

Chapter 13 Bankruptcy

Chapter 13, also known as reorganization bankruptcy, is an option for those who were unable to qualify for Chapter 7 or for those who want to protect certain property.

Here’s what Chapter 13 can do for the following financial situations:

  • Foreclosure - When you file for bankruptcy an “automatic stay” ensues thus stopping the foreclosure proceeding. You will have a chance to work out a payment plan to help you catch up on your mortgage payments.
  • Vehicle repossession - Filing for Chapter 13 can help you get back on track with car payments as well as stop the lender from selling your vehicle.
  • Taxes - There are certain types of tax debts that may be discharged and others that you will have to pay back through your Chapter 13 plan. Tax debts in bankruptcy is a very tricky area. A bankruptcy attorney can assess your specific tax issue and create the best plan of action to get it resolved.
  • Unsecured Debt - Contrary to popular belief, for most filers, unsecured debt is discharged just like in CH7.

Benefits of Chapter 13

  • Can file with no money down (if working W-2 job)
  • Keep current property such as your home or car
  • Get current on mortgage and car payments
  • Stop harrasment and other collections activity
  • Stop garnishments, foreclosures, repossessions, harassment even if you are short on cash.

Who is eligible?

To be eligible for Chapter 13, you must meet the following criteria:

  • Almost any US citizen. Even if you are a high income earner.
  • You must not be a stockbroker or commodity broker

If you have been faced with an overwhelming amount of debt, bankruptcy may be the best option for you. No matter how dire your financial situation, Moore & Associates, LLC can help. Contact us at (913) 225-8330 for a free initial consultation today.

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