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What's the difference between Chapter 7 and 13 bankruptcy?

Financially strapped Arizona residents may be aware that they have several options when it comes to bankruptcy. They can file for either Chapter 7 or Chapter 13bankruptcy, but they may not be aware of the differences between the two. When making such an important decision, it is important for potential filers to perform a thorough search and have all the relevant information in front of them.

Under Chapter 7 bankruptcy, most debts are wiped out and the process is a relatively short one. This may be the reason that 70 percent of the 1.175 million bankruptcy filings across the country were under Chapter 7. However, filers wanting to hold onto assets or who have a steady but low income may prefer to file for Chapter 13bankruptcy.

Through Chapter 13, filers get to repay their debts under a court supervised plan based on their income. They usually have five years to repay all or some of their debt under this plan. As with Chapter 7, foreclosure proceedings are put on hold and filers get the opportunity to catch up with their mortgage payments. Usually, the trustee's main goal is to repay priority debts such as tax payments, child support and alimony. When it comes to unsecured debts, debtors can pay any amount between full repayment and nothing.

Even though living within the budget set out by the court may be difficult, the bankruptcy system is very forgiving. If a crisis happens that makes it impossible to make a payment, trustees work with debtors to figure out a system that works for them. It is a false assumption that Chapter 13 filers do not get financing to buy cars or housing-lenders do lend to people going through bankruptcy proceedings.

Arizona residents struggling with their finances and considering the bankruptcy process should be aware of the full extent of the financial protection they are offered under bankruptcy laws. After carefully researching both options, they should choose the one that works best for them and allows them to regain control of their financial life.

Source: Fox Business, "Chapter 13 Bankruptcy: How it Works," Susan Ladika, May 9, 2013