Chapter 7 vs. Chapter 13: Which bankruptcy should you file?

Chapter 7 vs. Chapter 13: Which bankruptcy should you file?

You are lying on your bed staring at your due bills and collection notices and wondering how things will work out. Perhaps, you have recently suffered a significant health issue that has left you with a huge medical bill, or you have lost your job and are wondering what will become of your mortgage and other debts. At your lowest moment, bankruptcy crosses your mind.

Sometimes, your financial situation might be so grim that bankruptcy becomes your only way out. However, the decision to declare bankruptcy is one that you should never take lightly. One of the most important decisions you need to make when filing for bankruptcy is choosing how to file.

Understanding personal bankruptcy

Basically, there are two types of personal bankruptcies: Chapter 7 and Chapter 13 bankruptcies.

Chapter 7, or liquidation bankruptcy, as it is sometimes known, allows you to discharge unsecured debts such as medical bills, unsecured personal loans and credit card debts.

Chapter 7 bankruptcy is further broken down into two categories:

  • Asset cases – where your assets are sold and the proceeds paid off to your creditors
  • Non-asset cases – where you do not own any non-exempt assets or other valuables.

Chapter 13, or re-organization bankruptcy, on the other hand, allows you to discharge secured debts such as mortgages and motor vehicle debts. This type of bankruptcy allows you to restructure your debt and come up with a payment plan that works for you. Chapter 13 allows you to accomplish the following:

  • Stop your creditors from enforcing a debt collection order such as property foreclosure or repossession
  • Catch up with overdue mortgage payments
  • Spread out your debt repayment amounts over a longer period

The idea of bankruptcy comes with lots of negative connotations. However, if you get it right, bankruptcy can give you a fresh start, financially speaking.

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Amer Mustafa

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