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Chapter 7 Bankruptcy: Liquidation Under the Bankruptcy Code

The process of Chapter 7 bankruptcy is designed for debtors in financial distress who do not have the ability to pay their existing debts. Under this chapter, the debtor's non-exempt assets are liquidated by a trustee, and the proceeds are used to pay off creditors. It's important to note that certain debts such as alimony, child support, and certain taxes cannot be discharged under Chapter 7. Eligibility for Chapter 7 is determined through a means test, which assesses the debtor's income and expenses. Individuals, partnerships, corporations, and other business entities are eligible to file for relief under Chapter 7.

Chapter 13 Bankruptcy: Individual Debt Adjustment

Chapter 13 bankruptcy, often referred to as a wage earner's plan, enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period. If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. During this period, the law forbids creditors from starting or continuing collection efforts. Chapter 13 offers individuals a number of advantages over Chapter 7, including the opportunity to save their homes from foreclosure, reschedule secured debts (other than a mortgage for their primary residence), and consolidate all payments into one plan without direct contact with creditors.