The time could come when you can no longer abide by your financial situation. Once you get behind on your bills all kinds of bad things can begin to happen. Bill collectors will hound you and you may be at risk of actually losing your home and car unless you take action. Many potential bankruptcy filers are understandably confused about the numbers attached to the forms of bankruptcy. Read on to get a better idea of the difference in the two most common bankruptcy actions.

What Chapter?

The number matches the bankruptcy code, and chapters13 and 7 are the ones that most consumers use to get some debt relief. These two forms of bankruptcy offer very different goals, and it's helpful to understand how they differ so that you can file for the appropriate one.

Reorganization

You may have heard of businesses attempting to get their financial house in order by filing for a "reorganization", but you too can do this. Chapter 13 offers those with financial woes the opportunity to make arrangements with their creditors that will preserve property and loosen up the tight budgetary constraints that can occur when you get behind on the bills.

In some cases, creditors may not only lower the minimum payments and stretch out a loan repayment period, but they may agree to reduce the balance in return for making a good faith effort to pay part of the debt. This frees up cash and give debtors some breathing room and helps some get back on track with paying their bills.

The good thing about a chapter 13 is that there are no income restrictions, unlike the chapter 7 means test. This type of bankruptcy does take more time to complete, however; it may take several years to finish paying off the debts and have a final ruling. It also appears on your credit report just as long as a chapter 7 does, although some people think it looks less negative than a chapter 7 since you are at least trying to pay off your debts.

Liquidation

The reason that chapter 7 bankruptcy is also known as the liquidation bankruptcy is because that is actually the goal of the act. Legally speaking, the bankruptcy trustee is tasked with locating any of your property that can be seized and sold in an attempt to help pay off some of your creditors.

Now while this certainly sounds scary, the reality is usually not that bad. You have certain protections available to help you keep your property, such as personal exemptions and homestead exemptions. Exemptions let you reduce the amount of the value of things like homes and cars, and thus make them less attractive to the trustee. Another thing to keep in mind is that the value of a given item is reduced by the loan balance, so if you still owe a lot of money on something it will be of no value to the trustee.

The best thing about a chapter 7 filing is the way it automatically eliminates your unsecured debts, like credit cards, in an instant. Speak to a bankruptcy attorney, like Charles J Schneider PC, to find out more about these two and learn which is best for you.