Insolvency under Chapter 7 is also known as liquidation bankruptcy. The majority of individuals prefer this option. When an individual files for Chapter 7 bankruptcy, certain assets are liquidated and the proceeds are distributed to the various creditors. The courts determine an equitable settlement for the payment of creditors.
A liquidation bankruptcy may appear severe (and it is), but it does not mean you will be left with nothing but the clothing on your back. Certain assets are exempt from bankruptcy under chapter 7. These are necessary resources. Therefore, your home and vehicle will not be liquidated. Each state has its own interpretations and criteria for what is considered exempt, so it is prudent to obtain up-to-date guidance on such matters.
However, a liquidation or chapter 7 bankruptcy is no longer as simple as it once was. The increase in chapter 7 abuse and the number of bankruptcy filings necessitated a change in the law. In October 2005, changes were made to chapter 7 laws.
A person must pass certain means assessments before they can file for Chapter 7 bankruptcy, as a result of the changes. A person's income must be less than the state's median income in order to qualify. Additionally, a person cannot have assets that can cover at least 25% of their debt.
There are exceptions to the new rule to ensure that individuals in unusual situations are not unfairly disadvantaged by the modifications. For instance, the victims of Hurricane Katrina were given special considerations that allowed them to rebuild after their residences were destroyed by flooding.
Repayment bankruptcy is another name for Chapter 13 bankruptcy. You are essentially going to court to renegotiate the terms of your debt repayment. This typically entails renegotiating the repayment schedule, but in some instances you may also be able to negotiate the debt amount.
In a chapter 13 bankruptcy, assets are not liquidated and debt is not discharged as in a chapter 7 bankruptcy. The courts evaluate your financial situation and devise a reasonable repayment plan for your creditors.
The modifications to the bankruptcy regulations have also affected the administration of chapter 13. Prior to the modifications, the court determined which debts had to be repaid and reached an equitable arrangement. Before determining a debt repayment plan, they would consider your essential expenses, such as rent/mortgage, consumables, and utility bills. The Internal Revenue Service (IRS) has developed a formula to make this determination in accordance with the new law.
In brief, chapter 7 liquidates your assets but clears you debts. Chapter 13 renegotiates the manner in which you repay your debts, but you will not lose any of your assets and creditors will cease contacting you. Both have their position depending on the individual's circumstances and eligibility.""
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