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Article 10:
Bankruptcy: What's the Difference Between
Chapter 7 and Chapter 13?
By
Dan Johnson
When consumers contemplate the option of bankruptcy
generally, the remedy they are specifically referring to
is chapter 7 bankruptcy.
The effect of the filing is to discharge someone
saddled with debt from having to pay debts no longer
secured with a valid lien. It also has the added benefit
of serving as a court order to creditors (or their
collection agencies) to stop hassling you through
telephone calls, letters, and personal contact in an
effort to get you to pay the debt. But what, in effect,
does that mean for you the borrower?
Chapter 7
Filing for chapter 7 bankruptcy does not mean that
immediately all of your debts are eliminated in their
entirety. Rather, secured debt must be still be dealt
with. It does mean, however, that commonly unsecured
debts like credit card bills and medical expenses do not
have to be paid back. But getting off the hook here does
not come without costs. Rather, filing chapter 7 often
means the necessary liquidation (selling off) of most of
your personal property. While there are limitations to
what can be confiscated by creditors, (such as your home
under the homestead protection), expect that creditors
will sell off most of your valued possessions to pay
part of your debts to them. In addition, your credit
rating will be devastated by this filing. In filing
chapter 7 bankruptcy, you have essentially proclaimed to
the world that you are no longer worthy to be trusted
with future credit. That plays out practically insofar
as it becomes virtually impossible to get a mortgage for
a new home, a car loan, a credit card, and even limits
very small forms of credit like appliance financing and
at times payday loans. Because of the many drawbacks of
filing for chapter 7 bankruptcy, many individuals in
need of debt relief look for other options.
Chapter 13
One such option is chapter 13 bankruptcy. Chapter 13
filing means quite simply that you are restructuring
your debt by negotiating with your creditors and
establishing a plan to pay them off over the course of
three to five years. So, this is a formal declaration
that you will and have worked with creditors so that
they will get their money, only at a slightly slower
rate than they might have wanted. By promising to pay
off your debts, you are allowed to keep valuable
personal property such as your home and car. In a
similar way, taking this step can limit some of the
damage to your credit score that is incurred with filing
for Chapter 7 as opposed to Chapter 13. Typically the
arrangement reached with creditors is to have you pay
your regular monthly payments, plus an additional amount
that over time allows you to get caught up on your
payments over time.
There are both benefits and costs to whichever
bankruptcy approach you decide to take. On the one hand,
filing Chapter 7 offers you the freedom to be rid of the
heavy debt that is currently hanging over you, while
Chapter 13 offers you only the chance to restructure
that debt to be more manageable. But on the other hand,
filing Chapter 7 also means the liquidation of almost
all your valuables as well as the total devastation to
your credit rating, whereas filing Chapter 13 allows you
to keep many of your possessions while keeping your
credit score intact.
Dan Johnson enjoys writing about
bankruptcy.
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articles about
Bankruptcy, please
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