Which Bankruptcy, Chapter 7, 2005 Act or Chapter 13 Bankruptcy?.

Filing for Bankruptcy-When circumstances become so intolerable Bankruptcy is seen as a way out because it brings closure to worrying how to pay unsecured debt and with that better control of finances, a fresh start and a measure of freedom. But what sort of bankruptcy should a person choose: Chapter 7 or Chapter 13?. The key to this decision is embodied in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 otherwise known as the 2005 Act.

Under the Chapter 7 Bankruptcy all unsecured debts are discharged; the 2005 Act makes that route more difficult because a person has to satisfy a ‘means test’ to qualify. The means test is designed to compare the amount of unsecured debt; which is debt that is not guaranteed or supported with collateral property to the level of income less living costs. Which mean that if a person has some money left over each month after paying reasonable living costs then that excess of monthly cash can be used to pay down debt over an extended period.

After a person has been applied to the means test and has satisfied its requirements then those who are judged incapable of paying their debts will be allowed to proceed with a Chapter 7 and dischage of debt.

And people who are judged to be capable of paying debt will either have their application dismissed or converted into a Chapter 13 Bankruptcy that has a repayment plan over an extended period of up to 5 years.

This type of bankruptcy is for people who receive a regular income but who have run into difficulties and need help coping with and managing debt.  Under this chapter people are encouraged to repay creditors either partially or in full and complete settlement by installments that typically span 5 years; the 2005 Act extended the original duration that was previously only 3 years. After Chapter 13 has been invoked then creditors are prohibited from either starting or continuing debt collection activities. The 2005 Act makes people who apply for a Chapter 7 Bankruptcy through means testing to often convert to a Chapter 13 because of the mutual benefits to both the debtor and creditor.