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Which Chapter of Bankruptcy Is Best for You?

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Find the Right Chapter for You

Considering filing for bankruptcy? You are most likely going to file a Chapter 7 or Chapter 13. But how do you know which bankruptcy option is best for you and your situation? The Debt Doctors are here to explain the major differences between Chapter 7 and Chapter 13 and help you decipher which case would be most appropriate.

Types of Bankruptcy for PA Residents

There are several types of bankruptcy, but only two are common for individual debtors. Chapter 7, which is a liquidation process. And Chapter 13, which involves restructuring debt into a long-term plan

Chapter 7 Bankruptcy in PA

In a Chapter 7 bankruptcy, you essentially wipe out your debts and get a fresh start. Chapter 7 is a liquidation where the trustee collects all the debtor’s assets and sells any that are not exempt, (click here to see PA Exemptions.) The trustee sells the assets and pays the debtor any amount that is exempt. Then, the net proceeds of the liquidation are distributed amongst your creditors.

However, certain debts cannot be discharged in a Chapter 7 bankruptcy such as alimony, child support, fraudulent debts, certain taxes, etc. You can read more on PA’s Non-Dischargeable Debts here.

In many Chapter 7 cases, the debtor has a large amount of credit card debt, other unsecured bills, and very few assets. In the vast majority of these cases, Chapter 7 bankruptcy can eliminate these debts.

Chapter 13 Bankruptcy in PA

Under a Chapter 13 bankruptcy, the debtor proposes a 3-5 year repayment plan. This plan goes to the creditors that are offering to pay off all or part of the debts from the debtors future income. Chapter 13 can be used to:

  • prevent a home foreclosure
  • make up for missed car or mortgage payments
  • pay back taxes
  • stop interest from accruing on your tax debt
  • keep valuable, non-exempt property, and more.

As long as you stick to the terms of your repayment agreement, all your remaining dischargeable debt will be released at the end of the plan.

Several factors go into the amount that is to be repaid, like the debtor’s disposable income. This is usually determined as part of the Pennsylvania Means Test. In addition, the total amount paid to creditors in the Chapter 13 plan must also be as much as creditors would receive if the debtor filed a Chapter 7 bankruptcy instead.

To file a Chapter 13 bankruptcy, you must have “regular source of income” and some disposable income to apply towards your payment plan.

Chapter 13 bankruptcy is generally used by debtors who want to keep secured assets like a home or car. When they have more equity in those secured assets, they can protect them with PA’s bankruptcy exemptions.

Which Chapter is the Right Fit for You?

Understanding the ins and outs of filing for bankruptcy can help you decide if it’s the right path for you. Chapter 13 bankruptcy is a reorganization and restructuring of debt. Whereas, Chapter 7 bankruptcy is a liquidation. If you are unsure which chapter is best for you and your situation, contact us for a free consultation. Making the right decision now can enable future financial success and eliminate sleepless nights.

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