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Should you choose Chapter 7 or Chapter 13?

Filing for bankruptcy is an intensely personal decision that requires careful consideration. Once you decide to file, you must next choose whether Chapter 7 or Chapter 13 is best for your unique situation. An experienced bankruptcy attorney can help you decide which option will give you the best outcome depending on your circumstances.

Regardless of which path you choose, the end result is the same: freedom from debt and the ability to get a fresh financial start. The two consumer bankruptcy options don't work the same way, though, and the path to freedom from debt is very different depending on whether you go with Chapter 7 or Chapter 13.

Chapter 7

Chapter 7 is known as liquidation bankruptcy. Non-exempt assets are sold, and the profits are divvied up amongst creditors. There is a long list of state and federal exemptions to help protect your most valued property (like your home, car, personal items, household goods, work tools and more). Chapter 7 usually wraps up within a few months, but will show up on your credit rating for up to 10 years. It offers extensive debt dischargeability without the need to make ongoing payments to your bankruptcy creditors.

Chapter 7 also involves something called a "means test." If your household income is less than a certain threshold amount, you qualify for Chapter 7. Otherwise, Chapter 13 or Chapter 11 are your only consumer bankruptcy options. For most individuals, though, Chapter 11 is not an attractive option.

Chapter 13

Chapter 13 is reorganization bankruptcy. Under a Chapter 13 plan, you make monthly payments to the bankruptcy trustee for a number of years (usually between three and five). The trustee distributes funds to your creditors per the bankruptcy settlement agreement. Once the repayment period is complete, remaining unpaid debt is discharged.

It takes substantially longer to conclude a Chapter 13 proceeding than a Chapter 7. A Chapter 13 will typically stay on your credit report for about seven years. Chapter 13 is usually a good option if you have a regular income and are committed to paying down your debt. It also is a useful tool in certain circumstances to save a home from foreclosure. Chapter 13 has no liquidation requirements, so there are no concerns that you might lose property as part of the proceedings.

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