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Choosing between Chapter 7 and Chapter 13 bankruptcy

Most residents of Vancouver understand that the United States Bankruptcy Act can be used to keep creditors at bay and prevent loss of assets such as a house or automobile. A critical aspect of the nation's bankruptcy laws is often overlooked when people are considering filing a bankruptcy petition: the difference between a Chapter 7 proceeding and a Chapter 13 proceeding. An exhaustive list of the differences between these two types of proceedings is too long for this blog post, but an overview can guide initial decision-making.

Chapter 7 is intended to wipe out a person's debts by selling assets subject to lawful seizure and using the proceeds from those sales to settle claims with creditors. When a Chapter 7 proceeding is finished, the petitioner's debts will be eliminated except for secured claims, such as a mortgage or automobile loan. Chapter 13 takes a different approach by requiring the debtor to submit a repayment plan under which the debtor agrees to make payments to creditors over time, usually five years, until the debts are paid off. A Chapter 13 proceeding does not eliminate debt outright, as does Chapter 7, but it provides breathing space for the debtor to reorganize his finances and keep his or her assets.

Chapter 7 is not available to all debtors. A person must first demonstrate that his or her income is below a certain level before filing a Chapter 7 petition. If a person's income is too high, that person will be limited to seeking relief by filing a Chapter 13 repayment plan.

Different obligations may be treated differently in Chapter 7 or Chapter 13 proceedings. Persons wondering about which kind of bankruptcy petition to file may wish to consult a knowledgeable bankruptcy attorney for advice on their specific situations. An experienced attorney can review an individual's financial situation and explain which kind of proceeding would be most effective.

Source: FindLaw, "Chapter 13 vs. Chapter 7 Bankruptcy," accessed on Sep. 4, 2017

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