What Are the Two Major Types of Consumer Bankruptcy Proceedings?

by Beverly Bird
Chapter 7 and Chapter 13 offer different advantages.

Chapter 7 and Chapter 13 offer different advantages.

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In a personal bankruptcy, debtors typically seek Chapter 7 or Chapter 13 bankruptcy protection. Major and fundamental differences exist between the two, and not every consumer qualifies for each. If you meet the requirements for both, your choice usually depends on your unique personal concerns.

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Chapter 7

Chapter 7 is a liquidation bankruptcy. The trustee sells your assets to raise cash, and uses it to pay off your debts. You can protect some of your property with exemptions – dollar amounts of equity or value that are not subject to liquidation. If there's no unprotected value, the trustee will typically abandon your property – he won't sell it. Your unpaid debts are discharged at the end of the Chapter 7 process, so you no longer owe them. You must qualify for Chapter 7 protection by passing a means test that proves you don't have enough income to pay your reasonable monthly expenses and your creditors as well.

Chapter 13

Chapter 13 is a reorganization plan. You don't have to worry about the trustee liquidating your property, but you must enter into a court-supervised repayment plan, giving the trustee all your extra income each month after you pay your regular bills. The trustee then pays your creditors at least a portion of what you owe. After three to five years, the balances are discharged. You must qualify for Chapter 13 by proving that you have enough income left over each month with which to fund a repayment plan.