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What's the difference between Chapter 7 and Chapter 13?

There have been plenty of jokes made about the many different types of "chapters" there are when it comes to bankruptcy. However, the variety in bankruptcy allows for people and businesses to maneuver out of the many different financial situations they can find themselves in. Two of the most common forms of personal bankruptcy are Chapter 7 and Chapter 13.

The former is the stereotypical version of bankruptcy. Chapter 7 bankruptcy is an all-encompassing bankruptcy that many people turn to when their debts become too much. In Chapter 7, all of your unsecured debts -- such as credit card debt -- will be "discharged," which simply means the slate will be wiped clean and you will no longer have those debts. However, some of your assets will be liquidated as a result.

Of course, there are also secured debts, which are debts like student debt and child support payments. These can't be discharged through Chapter 7 bankruptcy.

Chapter 13 is a little bit different in that you essentially reorganize your debts and agree to pay them back, while also getting rid of some of your unsecured debt. Your new payments plan will last for five years and give you a chance to get back on stable financial footing.

The differences between these two types of bankruptcy may be small, but they are significant. Every person is different, and every financial situation is a little different, so you need to be organized and educated on what your specific situation means for any potential bankruptcy.

Source: New Castle News, "Dave Says: Bankruptcy, Chapter 7 vs. Chapter 13," Dave Ramsey, Aug. 1, 2014

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