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Breaking Down Bankruptcy: Chapter 7 or Chapter 13

Breaking Down Bankruptcy: Chapter 7 or Chapter 13

Filing for bankruptcy in Tennessee can be extremely complicated for those who are not familiar with the process.  Hiring an experienced bankruptcy attorney can make the entire process easier to manage.  Even before you hire an attorney, or shortly thereafter, you will have to determine whether you should file a Chapter 7 or a Chapter 13 bankruptcy.

Choosing the correct type of bankruptcy to file is crucial to having a successful outcome.  Simply put, a Chapter 13 bankruptcy is a reorganization of your debts without the loss of your assets whereas a Chapter 7 bankruptcy is a liquidation of your assets to repay your debts.

To break that down, a Chapter 13 bankruptcy is appropriate when someone has an income and can repay a portion of their debts.  In fact, if someone has too large of an income, they may only be allowed to file a Chapter 13 bankruptcy.  Under a Chapter 13 bankruptcy, to repay debts, the court will need to approve a repayment plan, which typically lasts somewhere between 3 to 5 years.  Even though, under this type of bankruptcy, you will continue to pay on your debts, the monthly payment will likely be the same as what you were paying to your creditors before filing for bankruptcy (although monthly payments could be more or less, depending on your situation) and at the end of the repayment term, the remainder of your approved debts are discharged.

There is a catch with Chapter 13 bankruptcies, which is that you must have an income and the ability to pay the approved repayment plan.  The huge benefit of this type of bankruptcy, and the reason people who are in trouble financially choose this type of bankruptcy, is because under a Chapter 13 bankruptcy, you get to keep all of your property.  This trade off, keeping your property in exchange for monthly payments, is the reason this type of bankruptcy is known as a “reorganization.”  So long as the terms of the repayment plan are met, debts are discharged without the loss of property.

However, in situations where people cannot make monthly payments, for those who have no income or very little income, a Chapter 7 is the appropriate type of bankruptcy to file.  In a Chapter 7, a trustee will collect and sell all non-exempt assets to pay creditors, then the rest of the debts will be discharged.  A homestead, such as your family home, may be an exempt asset, whereas the property inside the home may be non-exempt assets.  Non-exempt assets could include second vehicles, guns, jewelry, stamp or coin collections, family heirlooms, and other valuable assets.  To determine which assets are non-exempt in Tennessee, you will need to speak with a bankruptcy attorney familiar with the intricacies of Tennessee law.

For the most part, anything of value that can be sold to repay creditors will need to be turned over to the trustee.  Once the valuable assets are sold and the creditors are repaid as much as possible, the remainder of the debts are discharged.  The selling of assets to repay debts is why Chapter 7 bankruptcies are known as “liquidations.”  Property may be lost, but the approved debts are discharged without a repayment plan.  A Chapter 7 bankruptcy can be very difficult for people with a lot of assets, and, therefore, typically individuals or families with a lot of assets typically choose to file for a Chapter 13 bankruptcy.

If you are considering filing for bankruptcy, speak with a knowledgeable Tennessee bankruptcy attorney so that you can be sure you choose the right type of bankruptcy for your family and ensure that your repayment plan is affordable (Chapter 13) or that your important assets are deemed exempt (Chapter 7).  Choosing the right type of bankruptcy will put you one step closer to financial freedom.