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The difference between Chapter 7 and Chapter 13 bankruptcy

Many people facing the threat of foreclosure choose to file for bankruptcy to try to prevent the foreclosure from moving forward. One of the benefits of bankruptcy is the "automatic stay," which prevents your creditors from moving forward with their efforts to collect on your debts. In most cases, the automatic stay will also apply to your mortgage lender and prevent the lender from foreclosing on your home.

When choosing bankruptcy options, you'll have the choice of Chapter 7 and Chapter 13. Depending on your personal financial situation and needs, one of these options could be more appropriate than the other. Here's the main difference between Chapter 7 and Chapter 13 bankruptcy:

Chapter 7 bankruptcy, known as liquidation bankruptcy, involves the process of selling off some of your assets. Many of your personal assets will be exempt from this liquidation, but those that aren't exempt will need to be sold. The proceeds will then be used by the bankruptcy court to pay off as much of your debts as possible. Chapter 7 usually only works for people who have little or no capability to pay off their debts in the years to come.

Chapter 13 bankruptcy, known as reorganization, is the process of reorganizing your debts according to a payment schedule. The payment schedule, usually three to five years in length, must be court approved and it will not exceed your financial capabilities. Your debts will be consolidated, and you will pay a single bill each month. The money you pay will then be distributed to your creditors by the bankruptcy court.

In both of these types of bankruptcy, once the process has concluded, all of your remaining debts covered by the bankruptcy will be discharged. If you successfully use bankruptcy as a foreclosure prevention strategy, you will also get to keep your home.

Source: Findlaw, "Bankruptcy FAQ," accessed June 08, 2018

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