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How do Chapter 7 and Chapter 13 differ?

On Behalf of | Mar 27, 2017 | Articles, Bankruptcy Law, Firm News

Monroe County Bankruptcy Law

Understanding the differences between Chapter 7 and Chapter 13 bankruptcy plans is important for consumers struggling with debt.

Despite the relatively improved domestic economy now compared to a few years ago, many Pennsylvania residents find themselves unable to make ends meet. Unexpected medical expenses, divorce, job loss and more are just some things that can contribute to a person’s serious financial challenges.

When faced with the inability to meet financial obligations on an ongoing basis, the choice to pursue bankruptcy may be a wise one. However, which type of bankruptcy is best? There really is no single best type of bankruptcy as it is all about finding the plan that best fits the specific situation. Therefore, debtors in Pennsylvania should have a good understanding of both Chapter 7 and Chapter 13 bankruptcy plans.

The liquidation bankruptcy option

Chapter 7 is probably the most well-known type of bankruptcy plan for consumers. It is often called the liquidation bankruptcy because a person’s assets may be taken and sold in order to repay creditors. However, it is important for people to understand that not all assets may be lost. Only those connected to secured debt, such as a home with an associated mortgage, may be taken. In addition, the law does allow for some assets up to a certain dollar value to be retained even through a Chapter 7 bankruptcy.

In general, a Chapter 7 plan may be best for people with predominately unsecured debts. These include things like medical bills or credit card debt. Through a Chapter 7 bankruptcy, these debts can be completely eliminated and there is no required repayment.

A Chapter 7 plan is also a relatively simple and fast process compared to a Chapter 13 plan.

The wage-earner’s bankruptcy option

As noted, a Chapter 13 plan is more complicated and takes longer to complete than a Chapter 7 plan. Whereas in a Chapter 7 plan, identified debts are simply discharged, a Chapter 13 bankruptcy establishes a 36- to 60-month repayment plan. It is not until this repayment period is completed that a discharge is received.

While Chapter 7 does allow for homestead or other exemptions, people with valuable secured assets like homes may generally be better off filing for Chapter 13 instead of Chapter 7. This is because asset forfeiture is not part of a Chapter 13 plan.

A debtor makes monthly payments to the trustee who then pays creditors as per the agreed-upon plan. Because of the requirement to make these monthly payments, the Chapter 13 bankruptcy is often called the wage earner’s plan.

Selecting the right bankruptcy plan

Before preparing to file for bankruptcy, Pennsylvania residents are urged to speak with an experienced attorney. There are many laws that govern bankruptcy filings and it is important for debtors to get the right help they need and understanding the laws is integral to that.

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