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Chapter 7 or Chapter 13. Everything you need to know about bankruptcy in the US

Bankruptcy is a powerful tool for debtors, but it does not solve all problems. Read this article about what happens when you file for bankruptcy and how bankruptcy can help you improve your financial situation. And yes, bankruptcy is not always a bad thing!

Bankruptcy as a way to deal with debt

When faced with financial difficulties, knowing what happens in the event of bankruptcy is important before deciding whether to file for bankruptcy.

For example, bankruptcy stops most lawsuits, wage garnishment, and other collection activities. It eliminates many types of debt, including credit card balances, medical bills, and personal loans.

Filing for bankruptcy doesn’t absolve all debts and obligations, and creditors may still pursue payment. For example, you will still have to pay student loans if you are still trying to prove your financial difficulty. Also, coming to pay back child support and spousal support and most tax debts.

The process of declaring bankruptcy

Bankruptcy allows people struggling with debt to get rid of certain obligations and start a new life. The two types of filed bankruptcies (Chapter 7 and Chapter 13) offer unique benefits. The right chapter for you will depend on your income, assets, and goals.

  • Bankruptcy can stop debt collection activities.
  • Under the Fair Debt Collection Practices Act, you can send a letter asking the collection agency to stop communicating.
  • All agency employees will be prohibited from contacting you except to inform you that debt collection work has ceased. Or that the collection agency or original creditor intends to sue you or seek some other remedy.
  • Once you submit your application, the court will issue an order known as an automatic stay. It slows down most calls from creditors and the seizure of wages and lawsuits.


The eviction, which is still in litigation, will be stopped after filing for bankruptcy. But the residence is likely to be temporary. If your landlord already has an eviction order against you, bankruptcy won’t help.

Redemption and return of ownership

While automatic suspension will stop a foreclosure or foreclosure, filing a Chapter 7 application will not help you keep your property. If you fail to activate the account, you will lose your home or car after the seizure is lifted. Whereas Chapter 13 has a mechanism to let, you catch up on past payments so you can keep the asset.

  • Bankruptcy can pay off credit card debt and most other non-priority unsecured debts.
  • Default is well suited for erasing most non-priority unsecured debts besides school loans. For example, you can pay off unsecured credit card debt, medical bills, late utility bills, personal loans, gym contracts, and more.
  • The debt is unsecured if: you have promised to return the purchased property when you paid the bill. On the contrary, you must return the purchased item if you have a secured credit card. Items like jewelry, electronics, computers, furniture, and large appliances are usually classified as secured debts. Typically, instructions or loan agreements contain the necessary information regarding this matter.

Chapter 7 or Chapter 13

Each of Chapters 7 or 13 offers unique solutions to debt problems. The two types of bankruptcy work very differently.

Chapter 7

When filing for Chapter 7, you request the bankruptcy court to discharge or eliminate most of your debts. In exchange for this repayment of qualifying debts, the bankruptcy trustee in charge of your case may take any property you own. If it is not exempt, sell it and distribute the proceeds to your creditors.

  • Chapter 7 takes an average of three to four months to complete.
  • If you are applying under Chapter 13 instead of Chapter 7, you will likely have to pay off some of your unsecured debt under a three to five-year repayment plan.
  • Chapter 7 is primarily for low-income applicants, so it will only help you keep your property if you are up on payments.
  • If you think you will soon run into significant debts, such as medical bills or unpaid rent, waiting until you file for Chapter 7 bankruptcy may be wiser. Won’t get away.

Chapter 13

Claimants under Chapter 13 pay creditors the value of any ineligible property under the repayment plan.

  • Stop mortgage foreclosure and force the lender to accept a plan that allows you to make up for missed payments over time.
  • Preserve property not protected by a bankruptcy exemption.
  • Will “reduce” secured debt when the property’s value exceeds the amount owed.

What property is exempt from the fee depends primarily on state law. Generally, exceptions protect some share in your home and car, pension funds, social benefits, and most household items, furniture, essential clothing, appliances, and books.

What Bankruptcy Can’t Do

  • Bankruptcy does not prevent a secured debt lender from foreclosing or seizing property you cannot afford.
  • Bankruptcy does not remove obligations for alimony for children and spouses.
  • Bankruptcy does not cancel student loans, except in certain circumstances. Defaulting on student loans is only allowed if you can demonstrate that making payments would result in “unreasonable hardship.”
  • Bankruptcy does not eliminate most tax debts. Eliminating tax debt in bankruptcy is difficult, but it is sometimes possible for older unpaid invoices.


Of course, no one wants to go bankrupt. But this status has its advantages. Many debts are “forgiven” to you, and it becomes possible to start life from scratch. And the main choice that faces you is Chapter 7 or Chapter 13.

We advise you to consult with a mortgage advisor and consider various debt repayment options. Refinancing your debts could be a solution. Therefore, sign up for a consultation at LBC Mortgage to get comprehensive data on your financial situation!

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