Chapter 7 and Chapter 13 are two different kinds of bankruptcies available to individuals, some businesses, and married couples with financial problems. The following explains some of the basic differences between Chapter 7 and Chapter 13 Bankruptcies.
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Chapter 7 Bankruptcy
A straight liquidation bankruptcy, known as a Chapter 7 bankruptcy, involves the filing of a bankruptcy petition and statement of all property, debts, and budget information. The filing of the petition stops all creditor action against the Chapter 7 debtors and their property, including mortgage foreclosure, sheriffs sale, utility shut-offs, and other creditor harassment. Chapter 7 debtors can generally keep all their personal property, but debtors can keep their home and cars only if arrangements are made separately by the debtors themselves for payment of all current and back payments of auto loans, mortgage payments and finance company liens against their home.
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Chapter 13 Bankruptcy
A debtors reorganization plan, known as a Chapter 13 bankruptcy, is an alternative under the federal bankruptcy law to Chapter 7 bankruptcy. As with Chapter 7, the Chapter 13 petition stops mortgage foreclosure, sheriffs sale, utility shut-offs, and other creditor harassment. Chapter 13 also provides for monthly payments by debtors to a Chapter 13 trustee for three to five years. Out of these payments, the Chapter 13 trustee pays the following: mortgage arrearage, interest, late charges, court costs, and fees for the mortgage company's lawyer. Out of the plan payments, the Chapter 13 trustee also pays amounts owed prior to the filing the Chapter 13 for taxes, water/sewer liens, arrearage on second mortgages, and usually a small percentage of unsecured debt. Unsecured debt includes back medical and utility bills, credit card, store charge and loan balances for which there is not mortgage lien on the debtor's home.
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