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3 differences between Chapter 7 and Chapter 13 bankruptcies

Bankruptcy gives you the capability of wiping out your debts, allowing you to start again fresh. It allows you to gain financial freedom. 

Chapter 7 and Chapter 13 are the two most commonly used bankruptcies. Here are three differences between them that may help you figure out which one you can use. 

1. Means test

Eligibility for Chapter 7 and 13 bankruptcies rely on a Means test. The means test establishes if your income qualifies you for Chapter 7 or Chapter 13. Bankruptcy law designed the test to keep high-wage earners from filing Chapter 7. Instead, they use Chapter 13 to repay their debts. 

 2. Exemptions

Exemption law allows you to keep part of your property away from creditors in the event of a Chapter 7 bankruptcy. Chapter 7 exemptions may include your home, household goods, automobiles and tax-exempt retirement plans. 

Chapter 13 bankruptcy allows you to keep all of your property, even property considered nonexempt. However, creditors may receive a monetary portion of the nonexempt property. 

In Texas, you can choose to take either federal or state exemptions. 

3. Credit score

Bankruptcy may cause your credit score to plummet, no matter the type you file. Chapter 7 can have a more negative impact since you do not make repayments. Your credit report will show a bankruptcy for up to 10 years. 

You are making payments with Chapter 13, so creditors may still think you are worth the risk. However, the credit bureaus include bankruptcy on your report for up to seven years. 

There are pros and cons to filing bankruptcy. If you think you need to file, make sure you know the differences between the two types to give you the best chance of starting over financially. 


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