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Chapter 7 Bankruptcy Is a Power Debt Eliminating ToolChapter 7 bankruptcy is typically considered to be the best fit for individuals with significant amounts of unsecured debt. Unsecured debt simply means that the loans you received to purchase goods or services were not backed up by collateral like property or other tangible assets. Credit card debt is an unsecured debt because it is backed by nothing more than your promise and a legal agreement to repay the debt. By contrast, a car or home loan are typically secured because they are backed by the item you are borrowing against.
Under Chapter 7 bankruptcy, the filer receives immediate relief through the automatic stay. The automatic stay is a type of temporary injunction that prohibits creditors from commencing new collection actions against you for the duration of the stay. Often, this means that collection calls will stop and you will have some much-needed peace of mind. However, few benefits of Chapter 7 would occur if relief was limited to temporary measures.
Chapter 7 is also considered an extremely favorable way to eliminate credit card debt because upon discharge, it wipes away most unsecured debts. During the bankruptcy filing process, you and your attorney will list all the debts you currently have. If the filing is accepted and a discharge is granted you will be released from most and possibly all of the credit card debt you currently have. Therefore, Chapter 7 is typically the most favorable way to proceed; but in other circumstances, the taxpayer may need to explore other options.
Chapter 13 Can Provide Relief for Individuals Who Means Test Out of Chapter 7
Chapter 7 bankruptcy is means tested–filers must meet certain financial qualifications which generally results in limitations on income and disposable funds. Means testing is intended to ensure that only certain individuals who are truly struggling can make use of the most powerful and expedient form of bankruptcy. However, for individuals who means test out of Chapter 7, Chapter 13 can still provide relief.
Under a Chapter 13 plan, the filer must work with his or her bankruptcy lawyer to devise a repayment plan. The repayment plan can range from three to five years. During the three-to-five-year period, the individual must faithfully make payments to a trustee who, according to the plan, then distributes the correct payments to the creditors. While a Chapter 13 plan takes significantly more time to complete than a Chapter 7 plan, unsecured debt receives lowest repayment priority. Therefore, you can still have significant savings through a Chapter 13 plan. For certain people with assets and property that would not be fully protected under Chapter 7, Chapter 13 can provide the ability to keep that additional property.
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