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Bankrupt? Choosing the right plan for you

By Ruth Racey
Published: Friday, October 30th, 2009

Most of the people who are filing bankruptcy select Chapter 7, which permanently erases debts that are unsecured. Examples of these are credit card bills, which are not related to a specific property such as a house or a car.

Filing a Chapter 7 bankruptcy could mean that you are obliged to give up a part of your assets to pay your debts. However, majority of Chapter 7 filers are incapable of giving anything, either because they have no assets at all or because the property they need to give is exempted and protected from creditors. These exemptions may differ by state. They may also include furniture, clothes, office tools retirement accounts, and others to be accepted as payment.

Now if you want to preserve other assets that are not exempt, the best plan for you is to choose Chapter 13. In this chapter, debtors are directed to create a way to pay all, or most, of their debts in a five-year span. If they are successful, they will be permitted to keep all their property while any of their remaining debts will be erased. However, research states that most people fail to achieve their Chapter 13 plans, thus, their creditors are allowed to resume collection, or the plans are converted to Chapter 7s.

Filing a bankruptcy can only be applicable if you pass the following conditions:

  1. You do not have the capacity to pay most or all debts within the next two to five years.
  2. You do not have enough property.
  3. You do have property and assets that are not exempt, but you still want to stick to a Chapter 13 repayment agreement rather than a Chapter 7 liquidation plan.

Bankruptcy filing may only be useless if:

  1. You can pay your debts within five years or less.
  2. Majority of your debts cannot be wiped out. These include student loans, recent taxes, or child support. These kinds of loans cannot be erased and bankruptcy plans cannot do anything about them. You can still choose to file, but its disadvantages would certainly overshadow the benefits
  3. Cheating your creditors by hiding your assets and lying about your income.
  4. If your debts are results of luxurious living. You were nearly bankrupt, but you still spent lots of money for extravagance. You can still file if you lost your job, but the luxury debts may not be wiped out.
  5. You have filed a Chapter 7 bankruptcy within the past six years. You can file for a Chapter 13 plan anytime.

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