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Chapter 7 Bankruptcy

Also known as liquidation or straight bankruptcy, Chapter 7 is the most common type of bankruptcy for individuals. A court-appointed trustee oversees the liquidation (sale) of your assets (anything you own that has value) to pay off your creditors (the people you owe money to). Any remaining unsecured debt (like credit cards or medical bills) is typically erased. But as we mentioned earlier, this doesn’t include the types of debt that aren’t forgiven through bankruptcy, such as student loans and taxes.

Now, depending on which state you live in, there are some things that the court won’t force you to sell. For example, most people are able to hold on to basic necessities like their house, car and retirement accounts during Chapter 7 bankruptcy, but nothing is guaranteed. Chapter 7 also can’t stop a foreclosure—it can only postpone it. The only way to keep the stuff you still owe money on is to reaffirm the debt, which means you recommit to the loan agreement and continue making payments. But most Chapter 7 bankruptcies are no-asset cases, which means there’s no property with enough value to sell.

You can only file for Chapter 7 bankruptcy if the court decides you don’t make enough money to pay back your debt. This decision is based on the means test, which compares your income to the state average and looks at your finances to see if you have the disposable income (aka the means) to pay back a decent amount of what you owe to creditors. If your income is too low to do so, then you may qualify for Chapter 7.

Keep in mind that if you file for Chapter 7 bankruptcy, you will have to attend a meeting of the creditors where people you owe money to can ask you all kinds of questions about your debt and your finances. Yeah, that’s about as fun as it sounds. A Chapter 7 bankruptcy also stays on your credit report for 10 years, and you won’t be able to file for it again until after eight years.

Chapter 13 Bankruptcy

While Chapter 7 bankruptcy often forgives your debt, Chapter 13 bankruptcy basically reorganizes it. The court approves a monthly payment plan so you can pay back a portion of your unsecured debt and all of your secured debt over a period of three to five years. The monthly payment amounts depend on your income and the amount of debt you have. But the court also gets to put you on a strict budget and check all your spending (ouch!).

Unlike Chapter 7, this kind of bankruptcy allows you to keep your assets and catch up on any debt that isn’t bankruptable. Chapter 13 can also stop a foreclosure by giving you time to bring your mortgage up to date.

Anyone can file for Chapter 13 bankruptcy as long as their unsecured debt is less than $419,275, and their secured debt is less than $1,257,850.3 Plus, you have to be up to date on any tax filings. You should also know that a Chapter 13 bankruptcy stays on your credit report for seven years, and you can’t file for it again until after two years.


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