If you have had financial problems recently, you may be considering bankruptcy as a way to resolve the situation. In terms of personal bankruptcy there are two options open to you. These are chapter 7 and chapter 13 bankruptcy. This article will discuss the merits of each and contrast chapter 7 versus chapter 13 bankruptcy.



Chapter 7 bankruptcy is also known as a liquidation bankruptcy. Most people seek this option. When a person files for bankruptcy under Chapter 7, certain assets are liquidated and the money obtained is paid to the various creditors. The courts decide on an equitable agreement in terms of what is paid to creditors.





Filing a liquidation bankruptcy may seem like a last resort (and it should be) but you will not be left high and dry by the courts. The idea of the bankruptcy is to arrive at an equitable solution for both creditors nd debtors. So your essential assets, like your home and car are generally exempt from liquidation. This ensures that you can still contribute to the community and get back on your feet quickly.



With this said, a chapter 7 bankruptcy is not as easy to take as it has been in the past. A general increase in bankruptcies and cases where the laws have been flouted have resulted in changes to the statutes. In October 2005, the chapter 7 laws were changed.



Based on the changes, certain means tests have to be passed before a person can file for Chapter 7 bankruptcy. A persons income must be below the median income for the state in which they are a resident. Also, a person cannot have assets that can cover at least twenty-five percent of their debt.



There are allowances for exceptions to the new ruling, so that people in unusual circumstances are not unfairly disadvantaged by the changes. For instance, the people that suffered during Hurricane Katrina were given special considerations allowing them to start again after flooding had destroyed their homes.



Chapter 13 is not as common. It is effectively going to court to ask for help in renegotiating your debts. Renegotiating generally means restructuring the time you have to pay off the debts and getting any creditors off your back. In some cases you can also renegotiate the size of the debt.



Assets are not liquidated but the debt is not cleared as in a chapter 7 bankruptcy. The courts look at your financial situation and work out a reasonable schedule for you to pay back your creditors.



Chapter 13 has also changed since the revision of the bankruptcy laws. Before the changes the court appointed trustee would work out the payment schedule. Now it is derived by a formula created by the IRS.



Both chapter 7 and chapter 13 bankruptcy have their place in getting people out of financial difficulties. Chapter 7 can help you start a fresh but you will lose most of your assets. Chapter 13 lets you pay off your debts without being harassed by creditors. It makes the debt more manageable.