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When someone comes into my office with questions about bankruptcy, after going through their finances and determining whether I would even recommend bankruptcy, the first question they have is, “What is the difference between a chapter 7 and a chapter 13?”

Chapter 7
A chapter 7 is the most commonly filed bankruptcy. Likely, if you have heard anything about bankruptcy, you have heard about a chapter 7. In a chapter 7, there is a strict liquidation of property that occurs. Once you file a chapter 7, everything you own becomes part of the bankruptcy estate. A trustee is appointed to preside over the bankruptcy estate and will sell any property that is not protected by statute. The trustee then divides the proceeds from the sale of the property among your creditors. In many instances, the trustee cannot sell anything because all the property you own is protected by statute. But regardless if the trustee is able to sell and give the creditors $10,000.00 or $0.00, you are entitled to a discharge of all dischargeable debts at the end of your chapter 7 bankruptcy. This means that whatever you still owe is forgiven.

Chapter 13
Chapter 13 bankruptcy is typically referred to as the wage-earners bankruptcy. The most glaring difference between a chapter 13 bankruptcy and a chapter 7 bankruptcy is that in a chapter 13 bankruptcy you have monthly payments. The creditors get paid out of your monthly payments so there is no strict liquidation in a chapter 13 like in a chapter 7. There is not a fixed percentage of how much debt you have to repay in a chapter 13. The amount of your payments will depend largely on how much you are able to pay after all of your reasonable and necessary expenses are met (there are additional factors that must be met, but the primary factor is your ability to pay). For example, if after paying your mortgage, utilities, groceries, gas, insurance and other expenses you only have $200.00 left over then that is the amount you would pay to the trustee on a monthly basis. The duration of your payments will be anywhere from 3 to 5 years depending on whether or not your income is greater or less than the median household income. If it is greater than the median household income then the payment plan is 5 years. If it is less than the median household income then the payment plan is 3 years.

If you have more questions about chapter 7 or chapter 13 bankruptcy please contact an Arizona Bankruptcy Attorney with Riggs Ellsworth & Porter, today.

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