One of the primary purposes of a chapter 7 is to give individuals a financial "fresh start" and a clean slate. After discharge, the debtor has no legal obligation to repay the discharged debts.
Chapter 13 bankruptcy is for people who have valuable assets they don't want to lose, or who make too much money to qualify for a chapter 7. A person may also file a chapter 13 bankruptcy to repay arrears on a mortgage and keep his or her house.
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What is the Difference Between Ch. 7 and Ch. 13 Bankruptcy?
In a Chapter 7 bankruptcy, a person is able to completely eliminate any unsecured debts by liquidating certain personal assets to satisfy creditors. In order to qualify for Chapter 7 bankruptcy, a person must first pass a "means test" that compares their monthly income to their existing debt. If a person does not qualify for Chapter 7, Chapter 13 bankruptcy may be an alternative.
Instead of liquidating a person's assets, Chapter 13 bankruptcy involves creating a 3-5 year repayment plan for all or part of their outstanding debts. The majority of debts are to be repaid in accordance with the established plan.