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When is Chapter 13 better than Chapter 7?

Having overwhelming debt can become a nightmare. More people than you imagine can suffer a financial reversal, ranging from a job loss or a downgrade or a health crisis that results in massive medical bills.

In either of those cases, your income goes below the amount of money your creditors demand from you. You start to prioritize what you can pay immediately and what has to be put off. Then the harassing calls from the collection agencies start. Absent someone swooping in and paying your debts off, you could find yourself in an impossible situation.

Bankruptcy laws provide relief, but what kind?

Fortunately, the bankruptcy laws in Florida give you options to deal with the debt crisis you may have found yourself in. Two possible forms of bankruptcy exist, Chapter 7 and Chapter 13, for individuals.

Chapter 7 bankruptcy allows you to discharge all or most of your debts. In exchange, you will be required to surrender certain assets to help pay for part of those obligations. Fortunately, Florida mandates generous exemptions for assets subject to surrender, including most or all of the equity in your house and vehicle, individual personal property, retirement accounts, and so on.

This form of bankruptcy might be best for people with a lot of unsecured debt, such as credit card balances, and who have few assets.

When is Chapter 13 better than Chapter 7?

Chapter 13 bankruptcy is quite different from Chapter 7. It allows you to restructure your debt into a single, easy-to-manage payment. The amount of the payment is based on your entire financial situation and your ability to pay. This form of bankruptcy is ideal for people who still have a steady income and who have a lot of secured debt, such as a mortgage or car payment.

In some cases, your current income and overall financial situation may prevent you from being able to file under Chapter 7 because you do not meet the eligibility requirements (means test). In these situations, Chapter 13 may be your only option.

In general, Chapter 13 bankruptcy is preferred to Chapter 7 if, for example, you are behind on your mortgage, and you want to keep your house. Indeed, you will be able to keep all of your property under this approach. You may, in some cases, be able to negotiate a plan that will pay off a reduced amount of your debt. You will be protected against a creditor's collection efforts, including wage garnishments and foreclosure on your home.

The real legal answer: it depends

Which type of bankruptcy would be better for you truly depends on your personal situation. Although in general, Chapter 13 is the better option if you can meet a payment plan and you are interested in keeping your secured property, such as a house or motor vehicle, it is always best to consult a bankruptcy attorney to discuss which approach is right for you.

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