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Individuals who file for bankruptcy may have the option of either filing for Chapter 7, which discharges debts, and Chapter 13, which reorganizes debt. Both types of bankruptcy require credit counseling no more than 180 days before filing, and both types also affect a person’s credit report. A Chapter 7 bankruptcy mark stays on the score for 10 years, and Chapter 13 notations last for seven years.

Chapter 7 bankruptcy is a popular option, and it does not require a repayment plan. However, people must pass a means test to be able to qualify for this type of filing. Generally, individuals making over the median income in the state will not be eligible. This type of bankruptcy discharges nearly all unsecured debts, and the exceptions include student loans, taxes and support payments. If the bankruptcy is granted, the person’s property is usually liquidated, and the proceeds are used to pay off creditors. Automobiles are usually exempted if someone needs them to get to and from work, and homes may also be exempt if people keep up with their mortgage payments.

Chapter 13 bankruptcy requires a payment plan that may last from three to five years, but a filer may be able to keep his or her assets. However, payment plans generally require that people use all of their resources to pay off their debts after paying for necessities, such as food and housing. At the end of the repayment period, remaining debts are generally discharged.

Filing bankruptcy may enable someone to get out from under debt they would not be able to pay back otherwise. However, eligibility requirements can vary. A bankruptcy attorney may be able to explain the differences between Chapter 7 and Chapter 13 bankruptcy and might help a client understand and fulfill eligibility requirements.

Source: American Bar Assocation , “General Comparison of Chapter 7 and Chapter 13 Bankruptcy“, October 01, 2014