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Choosing between Chapter 7 and Chapter 13 bankruptcy

There are many reasons Massachusetts residents file for bankruptcy. Unexpected life changes like the loss of a job, catastrophic medical expenses or the desire to stop foreclosure are all common motivators. Whatever the reason, once a person makes the decision to file for personal bankruptcy, they must choose between a Chapter 7 and a Chapter 13 bankruptcy.

Usually, the most important factor in choosing Chapter 7 or Chapter 13 is the debtor's income. Chapter 7 bankruptcy is available only to people who earn less than a certain income. If the debtor's income is above the threshold, Chapter 13 is available. If a person files Chapter 7 but the court determines the person's income is above the cutoff, the court can either dismiss the case or convert it to a Chapter 13.

Chapter 7 bankruptcy is often referred to as a straight liquidation bankruptcy. The debtor must generally surrender all nonexempt property to the bankruptcy trustee to be sold or distributed to creditors. A Chapter 7 debtor will often have to turn their home over to the bank to satisfy the mortgage. If they have a vehicle loan, they may have to surrender the vehicle to the finance company. Once the nonexempt property has been turned over, all debts which are dischargeable are then discharged.

In contrast, a Chapter 13 bankruptcy is a reorganization of debts. The debtor is allowed to keep most of their nonexempt property, but must enter into a payment plan to partially reimburse creditors over a set period of time. If the debtor makes all the required payments, any remaining balance is discharged when the bankruptcy ends.

Whether to file Chapter 7 or Chapter 13 requires careful weighing of a number of factors. Consulting an experienced bankruptcy attorney can help a debtor make the best choice for their situation.

Source: Findlaw, "Chapter 7 vs. Chapter 13 Bankruptcy," accessed Dec. 5, 2015

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