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Chapter 7 versus Chapter 13 bankruptcy

Financial struggles can be overwhelming, and when it comes to seeking relief through bankruptcy, understanding the differences between Chapter 7 and Chapter 13 is important.

These two chapters of the United States Bankruptcy Code have distinct purposes and apply to different financial situations.

Chapter 7 gives you a fresh start

In 2023, 248,680 people and businesses filed for Chapter 7 bankruptcy, according to U.S. Courts. When drowning in unmanageable debt and seeking a swift resolution, Chapter 7 bankruptcy might be the lifeline. Commonly known as “liquidation bankruptcy,” Chapter 7 allows individuals to wipe the financial slate clean by selling non-exempt assets to pay off creditors. This process usually takes three to six months to complete.

The eligibility criteria for Chapter 7 are strict. A means test assesses the debtor’s income against the median income for their state. This ensures that only those facing genuine financial hardship qualify. While Chapter 7 provides immediate relief, it may require sacrificing certain possessions to settle outstanding debts.

Chapter 13 has a repayment plan

Chapter 13 bankruptcy is for individuals with a steady income who wish to reorganize their debts without losing assets. Often termed “reorganization bankruptcy,” Chapter 13 allows the debtor to create a manageable repayment plan spanning three to five years. This plan consolidates debts into affordable monthly payments.

The decision

Bankruptcy decisions have long-term implications on one’s credit score. Both chapters stay on the credit report for ten years, influencing future financial endeavors. Seeking professional guidance before making a decision is advisable to navigate the complexities of bankruptcy and choose the path that aligns with your financial goals.

Those who face financial challenges should seek alternatives prior to filing bankruptcy paperwork. These individuals should consider all the implications of bankruptcy carefully before taking action.


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