Video: Chapter 7 vs. Chapter 13 bankruptcy

Know the differences to make the right choice


Bankruptcy is a big, scary monster that a lot of people are afraid to talk about. But if you're considering it, you need to know how it works. And two numbers you should be aware of? Chapter 7 and Chapter 13.

Chapter 7 means most of your debts disappear. But that disappearing act comes at a cost: Most of your cash, many kinds of investments and perhaps your home equity are tapped to pay off your debt. Depending on your state, you may be allowed to keep some items, such as your car and household possessions. But you won't be living in luxury.

Chapter 13 is a little different. Your debts stay, but you'll get a plan to pay them off in three to five years. The good news? You get to keep your assets. And at the end, some debts may be discharged.

So when should you file Chapter 7 versus Chapter 13? If you don't have much property or you can't pay for basic living expenses, Chapter 7 may be for you -- but you'll have to qualify for it, based on your income and expenses. If you have sufficient income and assets to protect -- like a home -- Chapter 13 might be a better option.

Of course, there's also the matter of your credit report. Chapter 13 bankruptcy will go away in seven years, while Chapter 7 stays for 10.

Bankruptcy can be a monster to deal with, but knowing the basics will help you make the best decision for your finances.

See related: 8 myths surrounding bankruptcy, Your map through Chapter 7 and Chapter 13 bankruptcy, Beyond bankruptcy: What happens when you fail Chapter 13

Published: February 17, 2016

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Updated: 10-26-2016

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