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How does Chapter 7 compare to Chapter 13 bankruptcy?

Sometimes a person in Texas finds that they simply have more debts than they can pay back. This can be very stressful, especially when a person is being hounded by debt collectors or even threatened with foreclosure or a lawsuit. Fortunately, people in this situation may receive debt relief via a Chapter 7 or Chapter 13 bankruptcy filing.

In a Chapter 7 bankruptcy, a person's assets are liquidated, and the proceeds are used to pay back the person's creditors. While the idea of losing property to the bankruptcy process may be frightening, in 95 percent of Chapter 7 filings the value of the person's property does not cross the legal threshold and therefore the person will not have to relinquish any property. A Chapter 7 bankruptcy filing usually takes around three to four months to complete. It is a viable option for those who cannot pay back their creditors. In fact, around 96 percent of those who file for Chapter 7 bankruptcy will have their debts extinguished, meaning the debtor no longer has to make any payments on them.

In a Chapter 13 bankruptcy, however, a person will pay back some of his or her debts through a court-ordered repayment plan. The person's debts will be combined, and then the person will make a single, reoccurring payment based on their income over three to five years per the plan. From 2008 to 2010, around 41 percent of people who entered into a Chapter 13 repayment plan had their debts extinguished. In Texas, around 50 percent of bankruptcy filings were Chapter 13 filings. Keep in mind though, that if a person's Chapter 13 filing is dismissed, his or her creditors can take further action to collect on the debt, because the person is no longer protected by the bankruptcy process.

In the end, people thinking about filing for bankruptcy should carefully weigh their options. For some, a Chapter 7 bankruptcy filing is better for them, while others may find a Chapter 13 bankruptcy filing is in their best interests. No matter what a person chooses, however, it can help to have an attorney's representation throughout the bankruptcy process, so that one's rights are protected.

Source: ProPublica, "Bankruptcy: What's the Difference Between Chapter 7 and Chapter 13?," Paul Kiel, Sept. 27, 2017

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