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Key differences between Chapter 7 and Chapter 13 bankruptcy

During the years following the Great Recession, many families and businesses began to recover, but others are still experiencing crippling financial setbacks. Residents of Washington, D.C., who are struggling with debt and other monetary problems may be wondering if they can receive debt relief through bankruptcy. There are two main types of personal bankruptcy – Chapter 7 and Chapter 13 – that people typically consider.

According to the Administrative Office of the U.S. Courts, Chapter 7 bankruptcy is also known as the “fresh start” option. This means that those who qualify are able to have most, if not all, of their debt discharged. To qualify, one must pass a means test that proves their unsecured debt is more than 25 percent of their monthly income. Although Chapter 7 can remove most debts, those who undergo the process will likely lose their homes and other assets to repay creditors. They will usually be able to hold onto their vehicles if they can prove they need them to earn an income. Some types of debt, such as child support obligations, federal student loans and certain taxes, cannot be discharged through Chapter 7.

Chapter 13 bankruptcy gives people the chance to repay their debts through an affordable payment plan, states the American Bar Association. This type of bankruptcy is geared toward those with a regular income that exceeds the Chapter 7 means test. Chapter 13 allows debtors to repay creditors over a period of three to five years. In many cases, some debts are discharged. Assets such as the family home can also be preserved during a Chapter 13 bankruptcy.

Personal bankruptcy can help people regain their financial footing, but they should be aware of the differences between Chapter 7 and Chapter 13 to help them decide which option may be best for them.

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