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How do Chapter 7 and Chapter 13 bankruptcies differ?

If you, like many Americans, find yourself struggling with finances or drowning in overwhelming debt, you may be considering filing for bankruptcy as a way to get a fresh start. While you may be somewhat familiar with the terms "Chapter 7 bankruptcy" or "Chapter 13 bankruptcy," you may understand less about the difference between the two types of filings, or whether one type might be more appropriate for you than the other.

Additionally, not everyone may file for bankruptcy through Chapter 7, so it is wise to develop an understanding of the various options that exist for those seeking bankruptcy relief. To put it in simple terms, the American Bar Association notes that a Chapter 7 bankruptcy is essentially a bankruptcy liquidation, meaning you must surrender any assets deemed "nonexempt."

While a Chapter 7 bankruptcy typically discharges your debts, you may not be able to qualify for it if your household income is above that of the average Florida family. The bankruptcy means test ultimately determines whether a Chapter 7 filing is an option for you. The test compares your household income with that of others in your state and looks at your disposable income to determine whether you have the ability to repay part of your debt.

If you are unable to pass the bankruptcy means test, or if you have other reasons to pursue a Chapter 13 filing, recognize that under this type of filing, you must pay back at least some portion of what you owe. Under a Chapter 13 bankruptcy, you may be able to hang on to your home, car and other assets, though this may vary on a case-by-case basis.

While this information about bankruptcy is educational in nature, it is not a substitute for legal guidance.


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