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The basics of Chapter 7 and Chapter 13 bankruptcies

The United States Bankruptcy Code gives individual debtors two basic choices for bankruptcy: Chapter 7 and Chapter 13. The differences between both types of bankruptcy proceedings may be helpful in deciding which proceeding to use.

In a Chapter 7 bankruptcy proceeding, the debtor turns over all non-exempt property to the bankruptcy trustee, who then sells the assets and uses the proceeds to pay creditors. Any debts that have not been satisfied are then canceled, and the debtor has no further liability. In a Chapter 7 proceeding, the debtor may lose an automobile or house, or both. Not everyone is able to use Chapter 7. Tennessee has imposed a "means test" on potential Chapter 7 filers. Anyone whose annual income exceeds the median income in the state cannot file a Chapter 7 petition.

In a Chapter 13 bankruptcy, the debtor retains possession of most assets while preparing a plan of reorganization. The plan of reorganization contains the debtor's proposals for paying some debts in full, some debts in part and having some debts canceled. The plan must be followed for three or five years, depending upon the repayment proposals. A Chapter 13 proceeding generally gives the debtor more time to negotiate repayment plans with creditors, and it is useful for debtors who want to retain possession of valuable assets, such as a house or automobile. A person who wishes to file under Chapter 13 must demonstrate a "regular source of income" that can be used to pay debts under the plan of reorganization. In sum, Chapter 7 proceedings result in the liquidation of debts, while Chapter 13 proceedings allow the debtor to reorganize financial obligations.

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

Toll Free: 888-376-0282
Phone: 423-933-1606
Fax: 423-877-0363
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