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Chapter 7 and Chapter 13 differ in treatment of secured debt

Massachusetts residents filing for personal bankruptcy must choose whether to file Chapter 7 or Chapter 13 bankruptcy. For many, Chapter 7 is not an option because their income is too high for them to qualify. But, those who qualify for both should look at the advantages and disadvantages of each.

One of the factors to consider is how much of the individual's debt is secured debt. A secured debt is any debt for which the debtor has pledged property as collateral. A car loan is a common example of secured debt. The car is pledged as collateral for the loan if the borrower falls behind in payments the bank or finance company can repossess the car. Home mortgages are another familiar form of secured debt.

Chapter 7 is a liquidation bankruptcy, in which some of the debtor's assets are sold to pay off creditors. In a Chapter 7 bankruptcy, the debtor has several options for secured debt. The debtor can choose to let the creditor repossess the collateral. A second option is to keep making payments on the debt. Third, the debtor can pay the creditor the replacement value of the collateral. Finally, some forms of secured debt can be discharged in a Chapter 7 bankruptcy.

In a Chapter 13 bankruptcy, however, the debtor enters into a court-approved payment plan to repay creditors. The court may allow a Chapter 13 debtor to include secured debts in the repayment plan. With the court's approval, even past due payments can be included in the repayment plan and paid off over several years. If the debtor sticks to the repayment plan the creditor will not be able to repossess the collateral.

The amount and type of secured debt are important factors in choosing between Chapter 7 and Chapter 13 bankruptcy. There are many other factors to consider, however. An experienced bankruptcy attorney can help a debtor decide which type of personal bankruptcy will provide the best form of debt relief in their unique circumstances.

Source:, "Bankruptcy Definition: What Exactly Is It?," accessed July 23, 2016

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