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Understanding the differences between Chapter 7 and Chapter 13

If you find yourself in serious financial difficulties and have begun to consider filing bankruptcy in Tennessee, you probably have many questions. Your most basic question likely is which type of bankruptcy you should choose.

As you might expect, both Chapter 7 and Chapter 13 give you certain advantages. Each type, however, also brings with it its own disadvantages.

Chapter 7

Overall, nearly three-quarters of the people who file bankruptcy choose to file Chapter 7. If you choose Chapter 7, you can expect the following:

  • A reasonably simple procedure
  • An automatic stay during which time your creditors cannot attempt to come after you for payment of your overdue bills
  • The least amount of time spent in bankruptcy
  • Ultimate discharge of virtually all of your consumer debts, including your credit card debt

On the other hand, you will need to meet Tennessee’s income guidelines to qualify for Chapter 7. In addition, if you own your own home, Chapter 7 seldom, if ever, prevents it from going into foreclosure. It merely delays the time during which your mortgage lender can foreclose on your home.

Chapter 13

Chapter 13 therefore becomes your better choice if you own your home and want to stay in it rather than having it foreclosed. Unlike Chapter 7, which is a discharge process, Chapter 13 instead represents a reorganization process whereby you renegotiate your debts, including your mortgage, with your various creditors, often thereby achieving not only significant debt reduction, but also a more favorable interest rate on your various debts.

Once you complete your renegotiation phase, you devise a repayment plan which the bankruptcy court must approve. Then you simply work your plan, paying your creditors according to the plan for at least three years, possibly five. While Chapter 13 does not discharge your mortgage, the longer bankruptcy period gives you plenty of time to get caught up on your mortgage payment and save your home from foreclosure. At the end of your bankruptcy period, the court discharges whatever nonsecured debts you did not include in your repayment plan.

Admittedly, Chapter 13 puts you on a very strict budget for a relatively lengthy period of time. Nevertheless, it likely represents your best chance of saving your home from foreclosure.

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