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What is Chapter 13 bankruptcy?

Many Arizona residents may have heard of the term bankruptcy and may be aware that many debts can be discharged through this federal protection for struggling people. Nonetheless, they may not be clear about what bankruptcy actually is. Individuals can file for either Chapter 7 or Chapter 13 bankruptcy, depending on their income and assets. It is important to know the differences between both options before deciding which route to follow.

Through Chapter 7 bankruptcy, Arizona residents struggling with unsecured debt, such as credit card debt, medical bills and consumer bills, will be able to find relief as these debts will be cleared. Student loans are not discharged through Chapter 7 bankruptcy unless extreme hardship can be demonstrated. To become eligible to file Chapter 7 bankruptcy, debtors must pass a 'means test,' which means their income will be compared to the median income level in that state.

Those who do not qualify for Chapter 7 bankruptcy may become eligible for Chapter 13. Through this option, debtors can reorganize their debts into a payment plan spanning three to five years. Debtors themselves, repaying either some or all of their debts, create the debt repayment plan. If the plan is approved, an automatic stay is placed on creditors, preventing them from taking any further action to collect their payments.

Deciding whether to file for bankruptcy is an individual decision Arizona residents must make based on their particular situation and it may be a difficult decision to make, but once made filers usually feel a sense of calm as they embark upon a new stage of their financial life.

Source: Michigan State University Extension, "The difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy," LaShawn Brown, May 23, 2014