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Chapter
7 Bankruptcy
Chapter 7 is what most people refer to as "straight bankruptcy."
In a Chapter 7, the debtor turns over all nonexempt assets
to a Chapter 7 trustee. The Chapter 7 trustee liquidates the
assets and distributes the proceeds to the debtor's creditors.
By order of the Bankruptcy Court, the person is discharged
from all debts. A debtor can receive a discharge from his
or her debts only once every six years.
When you
file the case, your creditors are prohibited from continuing
suits against you and from attempting to collect their claims
against you and your property. Creditors must look solely
to the Bankruptcy Court and the assets within its control
for payment of their claims. By filing the Chapter 7 case
and obtaining a discharge, you receive a total forgiveness
of the discharge debts and receive a "fresh start."
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Chapter 13
Bankruptcy
Under Chapter 13, the debtor presents a plan of debt repayment that
is reviewed by the Chapter 13 trustee, creditors and the Bankruptcy
Court. The plan must be filed in good faith, must provide for payments
that are feasible in the light of the debtor's income and expenses,
and must also provide for payments over time that are equal in value
to the money creditors would have received if the debtor had chosen
Chapter 7 liquidation instead of Chapter 13. If a proper objection
is made to the plan, then the plan must also provide that, for a
period of three years, all of the debtor's income above reasonable
expenses will be used to pay debts.
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If the
Chapter 13 plan is approved, all payments are made through
the Chapter 13 trustee's office, and the trustee is paid a
commission. Most plans must run three years and cannot exceed
five years. Chapter 13 provides that the debtor receives a
discharge from most pre-bankruptcy debt upon making payments
called for by the plan.
There
are some disadvantages to filing Chapter 13. Debtors remain
under court supervision for the life of the plan, up to five
years. They are not free to make new debts or sell assets
without permission. Debtors who propose less than full payment
to their unsecured creditors will be required to live on the
budget for the life of the plan. The plan payments may be
deducted directly from the debtor's salary by order of the
court.
If plan
payments are not made, the case may be dismissed by the court
on motion by the trustee, or any creditor may petition to the
court to have their property returned. Some courts require
that you surrender recently purchased property or luxury items
before they will confirm a Chapter 13 plan. Chapter 13 is
a form of bankruptcy and will appear as such on your credit
record, even if you pay all the creditors in full.
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