Most Kentuckians who are contemplating filing a petition for personal bankruptcy may not understand the different kinds of bankruptcy proceedings or which kind of proceeding may better serve their needs. The United States Bankruptcy Code provides two basic kinds of bankruptcy for individuals, usually referred to as Chapter 7 and Chapter 13. Both plans have the important common features of allowing individuals to eliminate debt and stop creditor harassment, but each plan has distinctive features that require some knowledge of the plans before making a choice.

Chapter 7 plans are generally designed to liquidate all of the debtor’s non-exempt assets and use the proceeds to pay the claims of creditors. The balances of debts that are not paid in full are discharged. A significant problem with Chapter 7 is that the debtor may lose his or her residence if the mortgage loan is in default. Chapter 7 generally is most effective if the debts are credit card debts, medical debts, and personal loans.

Not everyone qualifies for Chapter 7. If a person’s average monthly income for the six months prior to filing the petition is more than the average for the debtor’s state of residence, he or she is not eligible for Chapter 7. Under Chapter 13, the debtor works out a plan with creditors to use future income to pay off existing debt. Chapter 13 plans extend over either three or five years, depending upon the debtor’s income and the amount of debt to be repaid.

The choice between Chapter 7 and Chapter 13 can be complicated. Anyone who is contemplating filing for bankruptcy may want to consider consulting an experienced bankruptcy lawyer for advice on which plan will be most helpful.

Source: FindLaw, “Chapter 13 vs. Chapter 7 Bankruptcy,” accessed on March 26, 2017