Bankruptcy Basics- Chapter 7 vs Chapter 13
According to the American Bankruptcy Institute, in the year 2010, more than 1.3 million people filed for bankruptcy. The reasons for the bankruptcies varied from loss of employment to salary cuts. With not much hope of a boom in the economy in the near future it is too much to hope for any dramatic changes in these figures in the current year.
For Americans drowning in huge debts, declaring bankruptcy may appear to be the only recourse. But before you do so, you should know some basics about the different kinds of bankruptcy that can be declared.
Chapter 7 Bankruptcy
Also called straight bankruptcy, the Chapter 7 bankruptcy is an option for debtors who have no significant assets to lose. With exception of exempt assets, all others are handed over to a bankruptcy trustee. The trustee liquidates these assets and distributes the proceeds among the various creditors in line with order of precedence. A period of 4 months usually elapses before the bankrupt debtor can claim to be discharged from all his debts.
Chapter 13 Bankruptcy
Also called reorganization bankruptcy, the Chapter 13 is a slightly different game. If the debtor has some property that is not exempt from bankruptcy proceedings and he wishes to retain possession of it, then he can opt for this kind of bankruptcy. Here, he simply files for a respite within which he expects to strengthen his finances and repay his creditors slowly over a 3 to 5 year period.
However, the law allows this option only for those who can prove that there is enough opportunity for them to improve finances in the interim period. The debtor has to show regular and sufficient income to cover living expenses plus creditor dues in order to file for a Chapter 13.
In general, real estate, cars, yachts etc are generally liquidated to pay creditors. But you should know what you get to keep and what you don’t differs from state to state in the U.S. For example, in Ohio you can claim exemption for $5000 equity in real estate while Florida law allows debtors to keep up to 160 acres of real estate out of city with a home built there.
If you are in financial distress and need to file for bankruptcy, ensure that you get legal advice from an experienced bankruptcy lawyer who is well versed in local laws. This will help you retain the maximum number of assets allowed by the law in your region.