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Arizona Bankruptcy Law: What is the Difference Between Chapter 7 and 13 Bankruptcy?

The term “bankruptcy” still holds connotations of debtors prisons and the social stigma of being financially insolvent. Luckily, people have not been jailed for declaring bankruptcy since 1833, and in some cases, declaring bankruptcy can be a viable part of a plan to clean up your finances.  However, it’s important to understand what bankruptcy means, and the difference between the two different types of bankruptcy filings. Here’s a look at the key differences between filing Chapter 7 and filing Chapter 13 bankruptcy.

Basics of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the type that most people think of when the subject is raised.  Under Chapter 7 bankruptcy, your unsecured debts are discharged, meaning that you don’t have to repay them, and once you’ve filed, your creditors are actually prohibited from trying to contact you to collect on the debts.  Debts that are discharged under Chapter 7 bankruptcy include:

  • credit card charges (including overdue and late fees)
  • collection agency accounts
  • medical bills
  • personal loans from friends, family, and employers
  • utility bills (past due amounts only)
  • auto accident claims (except those involving drunk driving)
  • business debts
  • money owed under lease agreements (includes past due rent)
  • social security overpayments, and
  • veterans assistance loans and overpayments.

How Chapter 13 Bankruptcy is Different

Also known as a reorganization bankrutpcy, Chapter 13 bankruptcy does not discharge all of your debts.  Instead, the court organizes a repayment plan for debtors to repay their debts based on what they can afford.  In this case, you get to keep all of your property, even nonexempt assets, and in exchange, you pay back at least a portion of your debts through a repayment plan, which typically lasts three to five years.  Chapter 13 bankruptcy is typically a better option if you’re trying to avoid foreclosure on your home or repossession of your vehicle.  

While most people typically opt for Chapter 7 Bankruptcy, some people are not eligible based on their financial situation, leaving the Chapter 13 filing as their only option.  In some cases, filing for Chapter 13 is the better option.  Filing for bankruptcy can help you get a fresh start and reorganize your financial life, but it’s important to speak to an experienced professional.  The process takes some time, and the steps must be followed correctly.  If you’re considering bankruptcy, schedule a consultation today. 


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