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How a Chapter 13 bankruptcy can help with credit card debt

Most people in Eastern Tennessee who are trying to decide whether to file a bankruptcy petition understand the fundamental difference between Chapters 7 and 13. A Chapter 7 filing usually results in the discharge of all of a person's unsecured debt, whereas a Chapter 13 filing usually results in a plan of reorganization that reduces the amount owed on certain debts but does not discharge the basic obligation to repay the debt. Many would-be Chapter 7 filers cannot pass the so-called "means test" that is the gateway to Chapter 7 because they earn too much money. These debtors must turn to Chapter 13 to deal with their credit card debt.

Even though a Chapter 13 petition does not result in the complete discharge of any debts, it can slow the collection process and provide time to negotiate more favorable terms. First, the filing of the Chapter 13 petition will invoke the automatic stay, the order of the bankruptcy court that stops all collection actions in their tracks. This provision will prevent credit card issuers from initiating collection actions or stop existing collection actions.

The petitioner under Chapter 13 must then provide the trustee with complete financial records, including both debts and assets. The time for payment can be stretched to five years and, in some cases, the amount owed to the credit card issuer can be negotiated to a lower amount. All credit cards must be cancelled under a Chapter 13 plan, but cancellation can be a benefit by imposing discipline on the debtor's buying habits. When the plan of reorganization is approved, the renegotiated terms of repayment will prevent the creditors from pursuing more aggressive collection measures.

Anyone who wants to understand the Chapter 13 process and possible outcomes should consult an experienced bankruptcy attorney. A knowledgeable bankruptcy lawyer can evaluate a person's financial situation and assess the impact of either a Chapter 7 or Chapter 13 petition.

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