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The Real Difference Between Chapter 7 & Chapter 13 Bankruptcy


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When bankruptcy becomes a necessity because of a bad financial situation, an individual will have to determine whether they should file for Chapter 7 or Chapter 13 bankruptcy. Understanding the differences between them is very important because they are separate and unique filings.

Most people who must declare bankruptcy do so by filing for Chapter 7 bankruptcy. This will pay back the money that a person owes by liquidating their assets. Afterwards, the court will consider the situation and determine how much must be paid to creditors.

One hundred percent of the person's assets will not liquidated. In some cases, people who file for Chapter 7 bankruptcy are able to keep their home and car. The liquidation process is based off of specific state laws.

Chapter 7 bankruptcy laws saw some changes in October of 2005. Now, in order to qualify for Chapter 7 bankruptcy, you must have a total income that is below your state's median and then pass a testing process. If your current assets would allow you to pay for 25% of your total debt, you will not be able to apply for Chapter 7 bankruptcy.

Testing associated with Chapter 7 bankruptcy can be overridden if a special situation presents itself. This occurred after Hurricane Katrina. Individuals who lost everything they had as a result of this disaster were allowed to have a fresh start. If, after the testing process, you are denied the right to file for Chapter 7 bankruptcy, you can make an appeal to the court, but, because of extra travel and expense, this is not always the most advantageous course of action.

Chapter 13 bankruptcy provides filers with a specific window of time in which creditors must be paid back and a way to do it. This does not require asset liquidation, and the amount you are required to pay is decided upon by the court after they have reviewed your personal case.

This process has also changed due to adjustment in laws regarding bankruptcy filing. Necessary expenses like groceries, utility bills, and rent or mortgage were once determined by the court, but this is no longer the case. Now an IRS formula is used to decide which expenses are considered to be necessary.

Credit counseling sessions must be attended by anyone who wants to file for bankruptcy before the government will allow them to do so. The government does not want anyone to make a hasty decision to file for bankruptcy and is trying its best to stop people from taking advantage of the system by hiding assets. For example, assets acquired just before the application process began can be non-exempted or liquidated by the government.

Bankruptcy proceedings are very serious and you should know which chapter you choose to file under and why before beginning the process. Be warned, bankruptcy lawyers are now charging more for their services since the filing process has become more complicated because of recent changes in the law.

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