What is better about chapter 13 over chapter 7 bankruptcy?

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Question:

I have been considering filing for bankruptcy, and everywhere I look I read that chapter 7 is the way to go. When is chapter 13 better? What is better about chapter 13 over chapter 7 bankruptcy?

Answer:

Chapter 13 bankruptcy is generally referred to as "wage earners" bankruptcy, while chapter 7 is "total liquidation bankruptcy." With a chapter 7, your debts are forgiven shortly after the initial filing process. With a chapter 13, you instead enter into a repayment plan that can last as long as three to five years. While having your debts simply forgiven may seem better, the specific advantages of Chapter 13 must also be considered. These advantages include:

No Means Test Is Required

In 2005, changes to the bankruptcy code made it much more difficult for the average person to file for a chapter 7. In order to qualify for bankruptcy protection under chapter 7 based on the current law, you must make below the median income for the state in which you live or you must pass a means test. This means test requires you to show you do not have excess disposable income that could be put towards debt repayment. If you do not pass the means test and you make more than the median income, you will not be eligible for a chapter 7. A chapter 13, however, will generally still be available to you.

You Do Not Have to Turn over Assets

When you file for chapter 7 bankruptcy, the bankruptcy code requires that non-exempt assets be sold in order to pay creditors as much as possible before your debts are forgiven. Essentially, this means that your personal possessions, including things like jewelry and antiques, may be taken and sold if you want to file a chapter 7. Exemptions do exist for your home--retirement accounts and some personal property--but these exemptions may not protect everything. With a chapter 13, assets are not relinquished so you do not need to worry about having to turn over things that belong to you.

Better for Your Credit

The fact of the matter is that both chapter 7 and chapter 13 hurt your credit. Because you are repaying debt with a chapter 13, though, it doesn't hurt your credit as much.

These are just a few examples of why chapter 13 may be better. However, your situation will dictate which is the right chapter of bankruptcy for you. You should strongly consider talking to a bankruptcy lawyer to review your situation and let you know what option may be best.

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