How do Chapter 7 and 13 bankruptcies differ?

Wisconsin residents struggling with high debt may find that a Chapter 7 or a Chapter 13 bankruptcy can help give them the fresh start they need.

Even though the economy has been growing stronger for several years now since the recession, many Wisconsin residents continue to face challenging financial situations. Unmanageable debt can result from many things including divorce, medical costs not covered by insurance, job loss and more. For people struggling to stay up with their seemingly increasing level of debt, filing for bankruptcy may provide important help on the road to a better financial future.

Before a final decision concerning whether or not to file for bankruptcy is made, consumers should understand how a Chapter 7 bankruptcy works and how a Chapter 13 works. Depending on the circumstances, one may be a better fit than the other.

How Chapter 7 bankruptcies work

Chapter 7 bankruptcies are perhaps the most common form of bankruptcy sought by consumers. The American Institute of Certified Public Accountants explains that a Chapter 7 is often referred to as a liquidation bankruptcy. This is because a debtor's assets may be sold in order to repay some of the debt that is owed. However, this does not mean that all of a person's assets will be lost.

According to the U.S. Courts, debtors are allowed to keep some assets even in a Chapter 7 bankruptcy. Which assets are able to be retained may vary based upon changing laws. Exemptions can stipulate the value of possessions that are able to remain outside the scope of the bankruptcy. These exemptions may include personal items like jewelry as well as houses and automobiles.

People who have a significantly greater amount of unsecured debt than secured debt may be more likely to benefit from a Chapter 7 bankruptcy. This is because unsecured debts are essentially eliminated. Credit card debt and medical bills are examples of unsecured debts as they are not connected to any collateral. Mortgages and auto loans are examples of secured debts that are attached to some form of collateral.

How Chapter 13 bankruptcies work

Debtors with secured assets that they wish to keep may want to consider a Chapter 13 bankruptcy. This approach can be especially helpful if the value of a home, for example, is greater than the amount allowed in an exemption. A Chapter 13 plan can be thought of as a structured form of debt consolidation.

Under a Chapter 13, a consumer's debts are consolidated. A trustee works with creditors to determine an acceptable level of repayment. From there, a monthly payment amount is identified. The consumer pays the agreed-upon amount to the trustee each month and the trustee in turn makes payments to each creditor. The length of a Chapter 13 plan is from 36 to 60 months.

Mortgages are not part of Chapter 13 bankruptcies. Homeowners must continue to make their mortgage payments separately even during the Chapter 13 bankruptcy term. You can, however, pay back arrears on your mortgage through a Chapter 13 bankruptcy, preventing and/or stopping foreclosure.

Getting help with debt

Talking with an attorney before making a decision about filing bankruptcy is recommended for Wisconsin residents seeking debt relief. Utilizing the right type of bankruptcy can make a difference in the ability to restructure one's financial base and move forward.