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If you have had financial problems recently, you may be considering bankruptcy as a way to resolve the situation. In terms of personal bankruptcy there are two options open to you. These are chapter 7 and chapter 13 bankruptcy. This article will discuss the merits of each and contrast chapter 7 versus chapter 13 bankruptcy.

Chapter 7 bankruptcy is effectively the liquidation of your assets to pay off all outstanding debts. If you are eligible for chapter 7 bankruptcy, the court effectively liquidates your assets and distributes the money to your creditors. This clears your debts and you can start again. Most people go for this option.

A liquidation bankruptcy may seem like a desperate option but the courts ensure that you will not be made destitute. Certain assets are exempt from bankruptcy. These items are the things you need to continue to be a productive member of the community. So your home and car are often exempt. However the interpretations of the law vary for each state so the criteria for exemption may vary.

With this said, a chapter 7 bankruptcy is not as easy to take as it has been in the past. A general increase in bankruptcies and cases where the laws have been flouted have resulted in changes to the statutes. In October 2005, the chapter 7 laws were changed.

Based on the changes, certain means tests have to be passed before a person can file for Chapter 7 bankruptcy. A persons income must be below the median income for the state in which they are a resident. Also, a person cannot have assets that can cover at least twenty-five percent of their debt.

There are allowances for exceptions to the new ruling, so that people in unusual circumstances are not unfairly disadvantaged by the changes. For instance, the people that suffered during Hurricane Katrina were given special considerations allowing them to start again after flooding had destroyed their homes.

Chapter 13 is a little different. You are not liquidating your assets but asking the court to restructure the way you pay off your debts. You will still pay off the debts but you may be given more time to meet this commitment. You may also get relief from creditors calling you. The end result is that you pay off the debts but keep your personal belongings.

In this form of bankruptcy you do not lose your assets but still have to pay off all your debts. The aim of taking the process to court to get relief from creditors and to make the payment schedule more equitable for you and the creditors.

Chapter 13 has also changed since the revision of the bankruptcy laws. Before the changes the court appointed trustee would work out the payment schedule. Now it is derived by a formula created by the IRS.

In short, chapter 7 liquidates your assets but clears you debts. Chapter 13 renegotiates the way you pay off your debts but you will not lose any of your assets and will stop receiving calls from creditors. Both have there place depending on your circumstances and whether you are eligible.

Tags: Money

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