Chapter 7 and 13 Bankruptcy Compared

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Understanding the differences between Chapter 7 and Chapter 13 Bankruptcy is essential to knowing which filing to complete in order to emerge from financial difficulty. There are substantial differences between the two forms of bankruptcy though both options should be fully considered prior to any filing.

Chapter 7 is the more commonly filed type of bankruptcy. It is based on a liquidation of the filing individual's assets and is commonly applied by those whose property is limited to basics such as clothing and furniture. Once the individual's assets have been liquidated, the creditors are paid back with the resulting monetary funds. Should they happen to own property such as a home or car, the filing individual may be allowed to keep such assets depending upon the judge's ruling. 

Chapter 7 is typically the most viable option for those who have little to no money left at the end of each month after having paid their basic finances. Liquidation of assets is of course only part of the process. The bankruptcy judge will also help determine exactly how much the creditors should be paid back. 

There are other distinct advantages to filing for Chapter 7 over Chapter 13, including the following: the discharging (or elimination) of most unsecured debts, the relative quickness of the process (typically no more than a few months) and the fact that creditors are not allowed to contact the filing individual while the automatic stay is in effect or after debts have been discharged.  

Chapter 13 is a less flexible form of bankruptcy filing, but it does come with the substantial advantage of usually forgoing the liquidation process. The amount that will be owed is determined by the court upon a thorough review of the individual case. 

Due to the fact that there is no liquidation involved, Chapter 13 is commonly filed when the individual has equity in a substantial amount of property (such as a house) and wishes to retain ownership. It is also the best alternative for those who are able to pay their living expenses on a regular basis but cannot maintain repayment of their debt at its current rate. 

A Chapter 13 filing also comes with its own set of benefits, including the fact that the filing individual is allowed to keep most of his or her property while gaining more time to pay down their debt. It also permits a window of three to five years during which delinquent accounts must be repaid.