A Quick Look at the Differences Between the Chapter 7 and Chapter 13 Forms of Personal Bankruptcy

Serious financial problems sometimes necessitate drastic action. When a person’s debts accumulate to the point that keeping up with payments is no longer possible, filing for bankruptcy can be the best way to respond.

When that moment arrives, an important decision will need to be made before proceeding any further. While there are three types of bankruptcy that are available to individuals, the form described under Chapter 11 is almost always used by corporations and people with especially complex financial situations.

The vast majority of individuals who decide to file for bankruptcy protection will choose between Chapter 7 and Chapter 13. These two distinct Bankruptcy Options each come with characteristic advantages and limitations.

Chapter 11 is Rarely a Worthwhile Option for Individuals

Chapter 11 bankruptcy is available to qualifying entities ranging from incorporated businesses to individuals. The types of bankruptcy defined under Chapters 7 and 13 of the relevant statute, though, apply only to individuals.

In fact, both of these styles of bankruptcy were specifically designed to accommodate the vast majority of people well. That makes both of them far more popular choices than Chapter 11 bankruptcy, which generally gives rise to an especially complex, expensive, and time-consuming legal process.

Two Forms of Bankruptcy for Most to Choose From

Most people will only need to seriously consider Chapters 7 and 13 after they decide to file for bankruptcy. In general terms, these two options break down like this.

Chapter 7. Filing for bankruptcy does not necessarily mean being assured of a fresh start. Chapter 7 bankruptcy, however, comes as close as the law allows to this frequently desirable result. This type of bankruptcy eliminates debts of most kinds for the average petitioner, although forms like student loans will not normally be eligible for discharge. The price to be paid for this level of relief is that most of the debtor’s assets will become subject to liquidation. While certain possessions, like a residence, will generally be protected, debtors can expect to have others sold to help defray the losses of creditors.

Chapter 13. Under chapter 13 bankruptcy, the court works out a repayment agreement with creditors that will normally see the overall amount of debt reduced. A debtor will typically be required to keep up with payments for about five years before the debts will be considered settled. As this form of bankruptcy normally allows the retention of all or most personal assets, it can be preferable to Chapter 7.

These two forms of bankruptcy combine to provide relief for millions of financially distressed people every year. In just about every case, choosing between Chapter 7 and Chapter 13 will be one of the most important steps to take toward that goal.

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