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What’s the difference between Chapter 7 and Chapter 13?

A financial crisis can happen in several ways. It may creep up on you slowly after a string of bad spending choices, or it can occur suddenly, such as after a job loss or medical emergency. For many in Louisiana, budgets are a delicate balance, and a single setback can send a family’s finances spiraling. If you are in this situation, you may be considering filing for bankruptcy to obtain relief from your debts.

Personal bankruptcy offers two options: Chapter 7 or Chapter 13. Before you take any steps, it is good to learn as much as you can about each process, so you understand which one is best for your situation. In fact, having an attorney answer your questions may help you to begin the process more quickly and avoid common mistakes along the way.

Which is right for me?

You may hear people call Chapter 7 “liquidation bankruptcy” and Chapter 13 “reorganization bankruptcy.” These nicknames indicate what may happen to your assets during the process. Each chapter has its pros and cons, its challenges and benefits. The following are just a few examples of how these two bankruptcy options compare and contrast:

  • In Chapter 7, a trustee will liquidate some of your assets and use the money to pay some of your creditors. The court may discharge any remaining balances on unsecured debt.
  • For Chapter 13, you work with the court and your creditors to establish a plan for repaying your creditors a certain percentage of what you owe. At the end of the payment period, the court may discharge the remaining debt.
  • To qualify for Chapter 7, you must pass a means test, which determines how your income compares to others in the U.S. with similar circumstances. Chapter 13 does not require a means test.
  • Chapter 7 is more appropriate for those who have few assets and limited income. Chapter 13 is often preferred by those who have certain assets they want to keep, such as a home or other valuables.
  • A Chapter 7 bankruptcy may remain on your credit report slightly longer than a Chapter 13.

You may have many other questions and concerns about the process and its consequences. It is reasonable to feel nervous and uncertain. However, if your finances are already in disarray and you are dealing with threats of foreclosure, wage garnishment or lawsuits, you may not want to wait too long before reaching out to an attorney for advice and assistance.

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