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Bankruptcy Law: What is the difference between a Chapter 7 and Chapter 13 bankruptcy?

Bankruptcy laws help U.S. Citizens who can no longer pay their creditors pay their debts by liquidating their assets or creating a repayment plan. Most bankruptcies filed in the United States are either a Chapter 7 or Chapter 13. In order to decide which bankruptcy to file, the choice often depends on a client’s income, debts, assets, and financial goals.

Chapter 7 Bankruptcy

The most common bankruptcy filed is a Chapter 7. Those who are allowed to file a Chapter 7 bankruptcy include companies, married couples, and individuals. A Chapter 7 bankruptcy is designed to wipe out a person’s unsecured debt, such as credit cards and medical bills.

To qualify for this, a person must have little to no disposable income. Those who earn too much money, or have excess disposable income, may be required to file a Chapter 13 bankruptcy instead. In Florida, a debtor must pass the Means Test, which means the debtor’s family income cannot exceed the average family median income in the state.

A trustee is appointed to administer a Chapter 7 bankruptcy. This trustee is responsible for selling the debtor’s nonexempt property. If the debtor does not own any nonexempt property, his or her creditors will receive nothing. This type of bankruptcy is designed to help low income debtors climb out of debt. The type of property, usually targeted would include luxury items, such as new TVs, appliances, electronic equipment, and expensive cars.

In Florida, residents are not allowed to use the federal bankruptcy exemptions. Florida residents must instead use the Florida’s specific exemptions include the following:

  • Florida’s homestead exemption, which allows debtors to exempt an unlimited value in that person’s home. In order to qualify for the exemption, a debtor must have owned the property for at least 1,215 days prior to their Chapter 7 being filed. The homestead exemption is limited to $146,450 for those cannot meet this requirement.
  • Personal property exemption of $1,000, which includes such items as jewelry, furniture, art, and electronics.
  • If a debtor does not use Florida homestead exemption, they can take a personal property exemption of $4,000.
  • Other exemptions include prepaid medical savings accounts, prescribed health aids, and educational savings.
Chapter 13 Bankruptcy

This form of bankruptcy is designed for debtors with regular income who are able to pay back a portion of their debt to their creditors. This means debtors will usually pay back some of their debt through a court approved repayment plan over a 3 to 5 year period. A Chapter 13 bankruptcy is most attractive to those with many assets because they may avoid having his or her property seized or liquidated.

Another benefit of a Chapter 13 bankruptcy is that it can stop a foreclosure. This is great for debtors who are behind on their mortgage payments and wish to save their house. However, Chapter 13 bankruptcy does not allow a debtor to reduce his or her monthly mortgage payments. A Chapter 7 bankruptcy will not stop the foreclosure process of a home, but the automatic stay will toll it for 120 days.

In order to file a Chapter 13 bankruptcy, a debtor and his or her attorney must present a repayment plan to the court. It is highly recommended a person considering bankruptcy hire an experienced bankruptcy attorney. For more information regarding whether a Chapter 7 or 13 bankruptcy could benefit you

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