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Understanding personal bankruptcy

Residents in the Washington, D.C., area who are feeling overwhelmed by outstanding bills may benefit from learning more about how the benefits and consequences of claiming bankruptcy. Understanding the difference between Chapter 7 and Chapter 13 bankruptcy has been instrumental in successfully solving many people's debt problems. Chapter 13 is sometimes referred to as a 'wage earner's plan", while Chapter 7 bankruptcy is more akin to a liquidation.

Chapter 13 bankruptcy is intended to restructure the finances and afford the debtor with a three to five-year repayment plan. In order to qualify, the debtor must be able to furnish proof of regular income and a plan to repay the remaining debt. Debtors are required to organize all information detailing the amounts of the outstanding payments owed to each creditor involved in the claim. Courts also require a statement of the debtor's financial affairs and schedules that outline assets and liabilities, expenses, executory contracts and current leases.

Once Chapter 13 is initiated, the debtor receives an automatic stay, serving as protection against any further action from the creditors. People who are interested in holding onto to certain assets benefit from choosing Chapter 13 bankruptcy. Chapter 7 bankruptcy is typically a faster process and can eliminate a variety of unsecured debts that include overdue utilities, medical bills, collection accounts and back rent. However, Chapter 7 bankruptcy does not discharge child support, alimony or unpaid tax liabilities.

People applying for Chapter 7 are typically required to undergo a means and income test, as well as credit counseling, in order to receive approval. Debtors who are interested in preventing a foreclosure process may be more interested in Chapter 13 than Chapter 7 bankruptcy. Legal counsel may be able to assist debtors with evaluating the available options and preparing the filing.

Source: Ebony, "The Different Degrees of Bankruptcy, Explained", Lynnette Khalfani-Cox, June 19, 2014

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