How Is Chapter 7 Bankruptcy Different From Chapter 13?


Quick Answer

The main difference between Chapter 7 and Chapter 13 bankruptcy is that Chapter 7 allows a person to dismiss his unsecured debt, while chapter 13 provides a way to restructure debts into a manageable repayment plan. Certain conditions must exist for someone to qualify for either type.

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How Is Chapter 7 Bankruptcy Different From Chapter 13?
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Full Answer

Chapter 7 bankruptcy is sometimes referred to as "liquidation bankruptcy" because qualified individuals are able to completely clear out certain types of debt, such as credit card balances and unpaid medical bills. When a person claims Chapter 7 bankruptcy, he must agree to sell any non-exempt assets to help pay creditors. Individuals above a certain income level cannot qualify for Chapter 7. Both individuals and business entities may apply for this kind of bankruptcy.

Chapter 13 bankruptcy is also known as "reorganization bankruptcy" because it is designed to help create a way for someone to repay their debts rather than get rid of them. Many people choose to claim Chapter 13 because it allows them to retain assets like their home and vehicle. This type of bankruptcy is most beneficial for individuals who have fallen behind with creditors, but can afford to pay some amount toward reducing their debt each month. Only individuals and sole proprietors may file for Chapter 13.

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