Why Chapter 7 Bankruptcy Or Chapter 13 Bankruptcy?

Why Chapter 7 Bankruptcy Or Chapter 13 Bankruptcy?

There has been a significant record increase in the number of bankruptcies filed over the past few years. This has led to the subject of bankruptcy being prominently and frequently mentioned in the news. Such increased awareness on the subject has informed many previously vague on the subject to realize there are different categories for bankruptcy. Certain categories are for individuals, certain categories are for businesses, and then there are even categories for municipalities. Of all the categories of bankruptcy, the two most frequently cited are Chapter 7 and Chapter 13 bankruptcy. A bit of confusion surrounds these two categories. Some might even consider them interchangeable. This is a tremendous error to make because the two serve completely different purposes.

In order to dispel the myths surrounding these two categories, it would be best to clearly define the differences between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy is commonly referred to as “liquidation” bankruptcy. This form of bankruptcy can be undertaken by businesses or individuals and it is the most frequently filed form of bankruptcy. When an individual files for Chapter 7 bankruptcy, the courts will examine the assets of the individual. Upon careful determination, the courts will then exempt certain assets from liquidation (sale) and then mandate the liquidation of other assets in order to pay back creditors. In some instances, certain debts may be discharged via the bankruptcy court. The type of debts which can be discharged may vary from state to state.

For a business, much remains the same with the difference being the business must cease all operations until a trustee is appointed by the court. The trustee will then make determinations as to what assets need to be liquidated and how they will be sold. A common myth here is the business never reopens. Actually, it can return to operations once the trustee has been named.

Those that file for Chapter 7 must accept the fact the bankruptcy will remain on their credit report for 10 full years.

Chapter 13 bankruptcy does not entail liquidation. Rather, it refers to the reorganization of debts as overseen by a federal bankruptcy court. The court has the right to eliminate portions or debts, restructure payment plans, and, essentially, determine which creditor gets what and when the creditor is paid. Restructuring debt via a logical and workable timely payment plan is a common outcome of filing Chapter 13 bankruptcy. Additional benefits are that debts can be discharged by the courts and interest rates could be lowered under certain circumstances.

This is not to infer that Chapter 13 bankruptcy comes without any negatives. As with Chapter 7 bankruptcy, a filing will remain on a credit rating for 10 years. Also, anyone filing Chapter 13 will not be able to acquire new credit unless given permission from the courts.

There is no answer as to which form of bankruptcy would be considered “better” than the other. Rather, one may be more appropriate or workable depending on one’s individual case. Seeking appropriate legal representation from a bankruptcy attorney is a must in order to determine which chapter of bankruptcy would be the right one to file.

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