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Comparing Chapter 7 bankruptcy with Chapter 13 bankruptcy

Many individuals in eastern Tennessee who are wondering about filing a bankruptcy petition are often puzzled by the differences between a Chapter 7 and a Chapter13 proceeding. Depending upon a person's individual financial situation, the differences can be subtle and complex, but understanding certain major features of each type of proceeding can help make a sensible decision.

A Chapter 7 bankruptcy is intended to use the debtor's existing assets to pay off debts. In order to use Chapter 7, the debtor must show that his or her income is lower than the median income for the state of Tennessee. If the debtor's income is more than the state limit, the debtor will not be allowed to seek a Chapter 7 discharge.

If the debtor is able to pass this "means test" and qualify for Chapter 7, his or her debts that are not paid are canceled, and the debtor walks away with no current debt. Unhappily, the debtor must abandon all assets, including the house and car that are not exempt from execution under Tennessee law. Some assets can be saved by signing a "reaffirmation agreement," such as agreeing with the bank that holds the mortgage on the residence to continue to pay the debt according to its original terms.

A Chapter 13 bankruptcy is intended to permit the debtor to develop a plan for paying his or her creditors over time. The debtor must have a regular income that will provide cash to fund the payment plan. The principal advantage of a Chapter 13 bankruptcy is the debtor's ability to keep his or her property by agreeing to make regular payments on existing debts. Also, while debts are not canceled in a Chapter 13 proceeding, the principal amount may be reduced. Most repayment plans last for 3 to 5 years, and the debtor must make periodic reports to the bankruptcy trustee.

Choosing between Chapter 7 and Chapter 13 can be confusing. A person who has no or very few assets can choose Chapter 7 with confidence, but even so, a Chapter 13 proceeding may be a more appropriate choice. Any who has questions about which bankruptcy proceeding to choose may wish to consult an experienced bankruptcy lawyer for advice.

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