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10 Pieces of Bankruptcy Information Everyone Should Know

        Money | Personal Finance

6
Chapter 13 Bankruptcy Requires a Plan
If the bankruptcy court determines you have enough disposable income to pay back some of your debts, you can't file Chapter 7; you must file Chapter 13. Michael Martin/Getty Images
If the bankruptcy court determines you have enough disposable income to pay back some of your debts, you can't file Chapter 7; you must file Chapter 13. Michael Martin/Getty Images

Chapter 7 is the fastest way to discharge unpaid debt, but it's not for everybody. If you've invested a lot of equity in your house, for example, you could lose it through Chapter 7. If you have significant assets and a regular source of income, Chapter 13 bankruptcy is often the better choice.

In some cases, choice has nothing to do with it. If you make too much money, the bankruptcy courts simply won't allow you to declare Chapter 7. The calculation is done using something called the means test. Essentially, if the court determines that you have enough disposable income (the "means") to pay back a portion of your debts without resorting to liquidation, then that's what you have to do [source: Nolo].

Under Chapter 13 bankruptcy, the court-appointed trustee works with the debtor and creditors to come up with a repayment plan. The creditors won't get all of their money back, but the debtor is forced to live on a very tight budget for three to five years, allocating every spare penny to repayment.

Almost a third of all individual bankruptcy filings from June 2013 to June 2014 were Chapter 13 cases. In contrast, a mere 8 percent of businesses declared Chapter 13 bankruptcy [source: U.S. Courts].


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