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Chapter 13: the benefits of reorganizing one’s debt in bankruptcy

In our last post, we wrote about the basic difference between the two types of personal bankruptcy—that is, bankruptcy filing types available to individual debtors. As we noted, the basic distinction is between liquidation of assets and reorganization of one’s debts.

While the goal of Chapter 7 bankruptcy is to liquidate nonexempt assets in order to settle with debtors, the aim of Chapter 13 bankruptcy is to come up with a repayment plan to pay off creditors according to one’s ability. The benefit of Chapter 7 bankruptcy is that it allows debtors to cut ties with creditors and clean their plate of debt. In Chapter 13 bankruptcy, the debtor sets up a repayment plan that leaves the debtor with a continued connection to the creditor. 

Creditors, regardless of the form of bankruptcy filed, often do not get back everything that is due to them, but that is just the nature of bankruptcy. In Chapter 13, a debtor is no longer responsible for past debt once the repayment plan is completed. That takes between three and five years.

One of the advantages of Chapter 13 over Chapter 7 is that it does allow a debtor to avoid liquidating assets they want to keep. This is especially the case with the family home. Although one doesn’t necessarily have to give up one’s home in Chapter 7 bankruptcy, if one’s equity exceeds the state homestead exemption one may end up losing one’s home.

Other factors where Chapter 13 would be beneficial include situations where: the debtor wants to strip away junior liens on his or her home; the debtor is unable to file for Chapter 7 bankruptcy because of a previous filing; the debtor fails the means test; or when the debtor wants to protect a co-signer from creditors.

Regardless of the circumstances of a bankruptcy filing, it can be very beneficial to work with an experienced attorney. Doing so ensures that one files the right type of personal bankruptcy and that one’s filing will proceed properly and with strong advocacy of one’s interests.

Source: Investopedia, “The Other Personal Bankruptcy Option: Chapter 13,” Daniel Kurt, September 30, 2014. 

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