Bankruptcy is a last resort option for those individuals whose financial situation no longer allows them to meet their debt payment obligations. The process, if one qualifies, results in having their debts discharged and provides them legal protection against any further collection efforts from their creditors.
Bankruptcy exists for both individuals and businesses. In this article, we will focus on the two types of bankruptcy options for individuals, Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy: This is the traditional form of bankruptcy. The entire purpose of chapter 7 is the fully discharge one’s debts. One of the more important distinctions to understand in regards to debt under a chapter 7 filing is that between secured and unsecured debt.
Unsecured debts are any credit that was extended to an individual based on their credit history, credit score, or goodwill. No collateral was put down to secure the loan and thus, it is called unsecured debt. Typical examples of unsecured debt include credit cards and personal lines of credit. A Chapter 7 bankruptcy will erase an individual’s requirement to pay these types of loans de-facto.
Secured debt is a bit more complicated and must be understood when one is contemplating a chapter 7 bankruptcy filing. Secured debt is any loan for which the individual was required to put down some type of valuable asset as collateral, such as property or vehicle, to secure the loan.
A chapter 7 filing does not remove the lender’s right to repossess whatever asset was used to secure the loan. When one goes through their chapter 7 procedure more likely than not they will lose possession of any assets used to secure a loan. This being said, if the value of the asset does not cancel out the balance of the loan a chapter 7 bankruptcy offers legal protection to the individual from and further legal actions taken by the lender.
For example, let’s say Sam borrowed $50,000 from the bank, putting up his vehicle to secure the loan. If Sam declares bankruptcy the bank will take his vehicle and sell it. Let’s say Sams’ vehicle was only worth $7,000, a chapter 7 bankruptcy would protect Sam from being sued for the remaining $43,000. To learn more about secured vs unsecured debt visit here.
Chapter 13 Bankruptcy: Whereas chapter 7 aims to discharge one entirely of their debts, chapter 13 is more a restructuring of debts in an effort to make allow the individual to pay all or part of their debts under more favorable terms. This can be done by increasing length of term, renegotiating interest rates, or, in some cases, decreasing the principal amount of the loan.
The most important part of the chapter 13 filing in the creditors meeting. Here, the individual sits down with their creditors and they try to agree to some type of plan or debt restructuring. The process rests on the condition that the creditors accept the plan and they are under no obligation to do so.
Conclusion: Both Chapter 7 and 13 bankruptcy closely follow the same process, but aim to achieve different results. Chapter 7 is concerned with discharging one entirely of their debts whereas chapter 13 is concerned with restructuring one’s debts to make payment easier and more affordable. Chapter 7 bankruptcy stays on one’s record for longer than chapter 13. For more information, one should contact a quality Orlando Bankruptcy Attorney.