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How do Chapter 7 and Chapter 13 bankruptcies differ?

As a Tennessee resident who is grappling with increasingly overwhelming medical, credit card or other debt, you may be weighing your options and trying to determine whether filing for bankruptcy could potentially give you the fresh start you desire. You may, too, recognize the terms “Chapter 7” and “Chapter 13,” but you may not fully understand the distinctions between the two main types of consumer bankruptcies or know which type may be more appropriate for your circumstances.

According to the American Bar Association, the primary difference between Chapter 7 and Chapter 13 bankruptcies is that Chapter 7 bankruptcies are essentially straight-up liquidations, while Chapter 13 bankruptcies involve establishing some type of payback plan. More specifically, Chapter 7 bankruptcies are for lower-income earners who do not have enough money at their disposal to pay back any of their debts, while Chapter 13 bankruptcies are for those with higher income levels who can typically pay back at least part of what they owe creditors.

So, what option might better suit your needs? To determine this, you will first need to find out whether a Chapter 7 bankruptcy filing is even an option for you, and you can do so by taking what is known as the bankruptcy means test. The means test assesses your financial situation to determine whether you have enough “disposable” income after paying monthly necessities to start to pay back some of your debts.

If the test determines you do not have enough disposable income available to you to start to pay back debts, you can, in most cases, move forward with a Chapter 7 bankruptcy. If it does not, you may be able to move forward with a Chapter 13 filing, or you can wait six months and take the means test again to see if anything has changed.

This information is educational in nature and not a substitute for legal advice.

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We help people file for bankruptcy relief under the Bankruptcy Code.