Personal Bankruptcy Laws
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Personal Bankruptcy Options in the U.S. Bankruptcy Code

Understand Your Bankruptcy Protections

The U.S. Bankruptcy Code was designed with consumers like you in mind, as evident in the different personal bankruptcy protections that are provided depending on your financial circumstances, needs and goals.

Under the U.S. Bankruptcy Code, you are afforded two personal bankruptcy protections to help you address your debts: Chapter 7 bankruptcy and Chapter 13 bankruptcy.

You've probably heard about these different personal bankruptcy protections in the past but may not know what they specifically do when filing bankruptcy.

The following page provides you with an introduction to these personal bankruptcy protections and what they may mean to you.

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Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 bankruptcy is commonly known as "liquidation bankruptcy". During Chapter 7 cases, you may have your unsecured debts (credit card debts, medical and utility bills, payday loans, etc.) forgiven.

Debt forgiveness is known as the Chapter 7 discharge.

Before you can receive this discharge, a bankruptcy trustee assigned to your case has the option of selling your non-exempt assets for cash that can be used to pay back your creditors. This is referred to as liquidation, but the good news is that most Chapter 7 petitioners do not have any non-exempt assets, meaning that they are able to keep most, if not all, of their property.

While Chapter 7 bankruptcy may allow you to get your unsecured debts completely discharged (excused), Chapter 13 personal bankruptcy deals with secured debt (debt like your mortgage or auto loan specifically linked to collateral like your home or car).

Rather than discharging these secured debts, Chapter 13 bankruptcy reorganizes these debts in the form of a 3-5 year repayment plan where you agree to repay your secured debts over time in exchange for getting to keep your home or car, which you may be in danger of losing to foreclosure or repossession.

Which Personal Bankruptcy Plan is Right for You?

An answer to this question depends on your financial situation, needs and goals.

While there are some general characteristics that may make one personal bankruptcy protection better for your situation than the other, a local bankruptcy lawyer can examine your needs in more detail and compare them with Chapter 7 and Chapter 13 bankruptcy.

Many people choose Chapter 7 bankruptcy when they:

  • Are overwhelmed by unsecured debts like credit cards and medical bills that you can't catch up on despite your best efforts
  • Own little property besides the basic necessities like clothing and furniture
  • Cannot meet basic expenses (in other words, they have little to no money left after paying necessary expenses each month)

Before you can file for this form of personal bankruptcy, you must pass the means test to determine your eligibility.

The Chapter 7 means test compares your income with the median income in your state for a family the same size as yours. Most people are still able to file Chapter 7 bankruptcy even with the implementation of the means test, which took effect with the new bankruptcy law in 2005.

As for Chapter 13 bankruptcy, people may choose this personal bankruptcy when they:

  • Own property with significant equity that you want to keep
  • Are facing home foreclosure or vehicle repossession
  • Have a regular income and the ability to keep up with current monthly payments, but cannot catch up on late/overdue payments for secured items

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Bankruptcy Lawyers Can Take You Through Your Personal Bankruptcy Options

While the different types of personal bankruptcy offer their own advantages, you're likely wondering which one makes more sense for your current needs.

A local bankruptcy lawyer can help you examine this question in greater detail than what we've provided on this page. Simply fill out our free bankruptcy case evaluation form or call 877-349-1309, and we'll quickly connect you with one of our nearby sponsoring bankruptcy lawyers who can evaluate your situation.

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The above summary is by no means all-inclusive and is not legal advice. For the latest information on bankruptcy laws, speak to a bankruptcy attorney in your area.

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