Different types of bankruptcies

A Chapter 7 bankruptcy and a Chapter 13 bankruptcy can both help people struggling with debt but in very different ways.

The worst of the recent recession may have officially hit the United States a few years ago but its effects are still felt by many people in Massachusetts today. Rebounding from serious financial loss and reduced income can take time and be very difficult. When considering options for how best to address high levels of debt, bankruptcy can be one thing to investigate.

All bankruptcies are not created equal and the fact that multiple types of bankruptcy exist can allow consumers to select the plan that best meets their needs. The American Bar Association explains that while Chapter 7 and Chapter 13 bankruptcies may both result in a discharge of debt, the way that each goes about it is very different.

What is the basic difference between Chapter 7 and Chapter 13?

A Chapter 7 bankruptcy is often referred to as a liquidation plan. A Chapter 13 bankruptcy is often referred to as a wage-earner's plan. In the former, no repayment occurs and debts are eliminated sometimes through the sale of assets.

With Chapter 13 plans, a structured repayment of debts is the means to a discharge and no assets are required to be sold in the process. This why many homeowners often choose to pursue Chapter 13 plans in order to keep their homes . However, there are exemptions and other situations which may make it possible to keep a home even with a Chapter 7 plan. For people who pursue Chapter 13 bankruptcies, homes may still be lost if mortgage payments are not continued, for example.

It is also important to note that some types of debts are not able to be included in a bankruptcy no matter what type of plan is chosen. Student loan debt and child support payments are just two examples of obligations that cannot be eliminated via bankruptcy.

How does Chapter 7 work?

With a Chapter 7 bankruptcy, the U.S. Courts report that a complete list of a consumer's assets and debts is provided to the court. This forms the basis upon which debts for discharge are identified. It is important for all debts to be included up front if they are to be eliminated. Consumers are allowed to keep some assets up to a certain dollar value. It is via this rule that some homes may be able to be kept instead of sold even with a Chapter 7 plan.

How does Chapter 13 work?

All assets and debts are also required to be given to the court in a Chapter 13 plan. However, the debts are taken and used to develop a plan via which the consumer repays them, at least in part. Monthly payments are made to a trustee who distributes monies to creditors. At the end of the plan term, a court-ordered discharge may be obtained if all requirements have been met.

How does someone choose a plan?

Because every situation is unique, it is always best to work with an experienced bankruptcy attorney to identify which plan best meets the needs of Massachusetts debtors. Talking to a professional as soon as financial problems are felt is the best way of not letting things get out of control.