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You've decided you don't have any other option; you're going to have to file bankruptcy. Now you're trying to figure out which chapter of the Bankruptcy Code will be the best one to use or if it makes any difference. Should it be chapter 7 or chapter 13?
You may have heard that bankruptcy chapter 7 is the best to use because you don't have to repay a lot of your debts and chapter 13 means you have to make at least some repayment. You may not have a choice in the matter.
You can't file chapter 7 if you've had a chapter 7 bankruptcy discharge within the last eight years or a chapter 13 discharge in the last six years. If you've cleared that hurdle, you still may not be eligible. You can only file for bankruptcy chapter 7 if your monthly income is below your state's median income and you can pass the means test.
If you are behind on payments on your car or mortgage and want to make them up to avoid problems, you can't use chapter 7. You can only make up missed payments under chapter 13.
You can't use chapter 7 bankruptcy to avoid having to pay taxes you owe, a student loan, or other debts that cannot be discharged in chapter 7. You can include these items in a chapter 13 repayment plan and pay them off over time.
If you have non exempt property that you want to keep, you can't use chapter 7 bankruptcy. Exempt property is protected from creditors by state and/or federal law. You need to find out what property is exempt in your state. All your nonexempt property is turned over to the bankruptcy trustee who sells it and uses the proceeds to pay your debts. Under chapter 13, you don't lose any property. You repay your debts out of your income.
If someone else is responsible for a debt along with you, you should use chapter 13. If you use chapter 7 bankruptcy, your creditors can go after that person for payment. Under chapter 13, your creditors have to leave the other person alone as long as you keep making your repayment plan payments.
There are a couple of other reasons you might want to choose chapter 13 bankruptcy. While you are making payments under your repayment plan, creditors cannot charge interest on debts. Also, under bankruptcy chapter 13, any unsecured debt that remains after you have completed your repayment plan is discharged. In even simpler terms, it means that after you finish the bankruptcy repayment plan, you don't have to pay any credit card debt that is left.
If you find there is no other way out of your financial problems except to file bankruptcy, you want to use the chapter of the Bankruptcy Code which is the best for you. If you are in doubt about which is best, consult a financial advisor or an
attorney.
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