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Bankruptcy and its Differences

Whether a consumer is considering bankruptcy as a last resort, or as a carefully planned means to a better end, debtors need to be aware of the different types of bankruptcy petitions available to individuals. While the general goal of bankruptcy is the clean discharge of as many debts as possible, the two main bankruptcy types attack the problem differently.

Chapter 7

Chapter 7 is designed to basically discharge unsecured debt. When a Chapter 7 petition is filed, the assets of a debtor revert to a trustee who attempts to liquidate items in order to satisfy creditors. If the debtor has secured debt, like a mortgage or a car loan, the home and car will not necessarily be sold, especially if the debtor is able to become or remain current on the payments. Certain types of property are considered exempt from a sale, and individual states have different rules concerning these. Some items, like student loans and taxes, are not readily dischargeable, and will be due and payable even after the discharge.

Chapter 13

Chapter 13, if filed with Melwani Law, P.C., is a process that establishes a payment plan. In Chapter 13, the debtor's disposable income is established by a court approved formula, and the debtor must send all of that income to the trustee on a monthly basis. The trustee will then decide which creditors get paid, and how much they will be paid. Again, secured creditors will receive their full payments, but in Chapter 13, any pre-bankruptcy arrears can be paid on a monthly basis. The length of the payment plan is usually three to five years, and at the end of the term, remaining unsecured debts will be cancelled. Remember, secured debts and obligations like taxes and student loans are rarely discharged. A quality bankruptcy lawyer can help explain the bankruptcy chapter 7 and 13 differences between the types of debt.

Bankruptcy can solve problems of massive debt, but the price for that help will include a severely damaged credit score. People do recover from bankruptcy, however, and a lower credit score may be preferable to the stress caused by mountains of debt.

Bankruptcy is not a do-it-yourself project and the most successful debtors first contact a reputable bankruptcy lawyer. The forms can be complicated, the laws arcane, and some debtors will merely be overwhelmed by the process. Debtors in New Mexico should carefully consider if bankruptcy is appropriate, and then call an Albuquerque bankruptcy attorney for advice and counseling.