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McCloud Law Group Legal Blog

Monday, June 9, 2014

Chapter 7 vs. Chapter 13 ?

 

Chapter 7 or Chapter 13 Bankruptcy: Deciding Which Will Work Best for You

 

If you’re trapped under a growing mountain of bills without any hope of resurfacing, you’ve probably considered how bankruptcy can help you.  If you’re largely unfamiliar with bankruptcy laws, you should gain an understanding of the key differences between Chapter 7 and Chapter 13 bankruptcy. Each of these two bankruptcy options provide specific benefits designed to address particular financial challenges. 
 
The Benefits and Characteristics of Chapter 7 Bankruptcy
 
Chapter 7 bankruptcy is most useful to parties without substantial disposable income. No repayment plan is used (because of income challenges). Instead, property is sold and the proceeds are used to pay down debt. 
 
A key component of Chapter 7 bankruptcy is the distinction between exempt and non-exempt property. Non-exempt property can be sold. Exempt property cannot. Non-exempt property varies by jurisdiction, but generally includes:
  • Second homes and vacation homes
  • Vehicles beyond a certain value and quantity
  • Expensive and valuable items and collections 
  • Cash, bank accounts and investments accounts
Examples of exempt property (i.e. property that will not be sold in bankruptcy) include: 
  • A primary home, i.e. a “homestead”, which can be a single family home, a condominium, a townhouse, a mobile home or other form of primary home
  • Varying financial assets, including most types of retirement assets 
  • A vehicle 
  • Personal and household property
  • Heirlooms 
  • Tools of a trade, including equipment, uniforms, books and vehicles
For both exempt and non-exempt property, value limits of vehicles, household property and other types of property vary by location.
 
A key advantage of Chapter 7 bankruptcy is that extensive debt is discharged once the bankruptcy is complete, regardless of whether the proceeds of sold property go very far in covering the amount of debt in question.
 
The Benefits and Characteristics of Chapter 13 Bankruptcy
 
Chapter 13 bankruptcy resembles Chapter 7 bankruptcy in that debt is discharged or “forgiven” at the end of the bankruptcy process. Chapter 13 bankruptcy differs from Chapter 7 bankruptcy in the way debt is reduced. Instead of relying on the proceeds of sold property to reduce debt, Chapter 13 bankruptcy consolidates and reduces a filer’s monthly debt payments. 
 
How to Proceed in Investigating Bankruptcy Options
 
When deciding whether to pursue Chapter 7 vs. Chapter 13 bankruptcy, would-be filers must weigh the advantages and disadvantages of selling non-exempt property over the advantages of retaining all property but retaining (reduced) monthly debt payments. Each filer’s decision regarding which bankruptcy type to use may depend on his or her circumstances and the opinions of the courts. For further information regarding Chapter 7 and Chapter 13 bankruptcy, contact a bankruptcy lawyer. 
 

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