If you have had financial problems recently, you may be considering bankruptcy as a way to resolve the situation. In terms of personal bankruptcy there are two options open to you. These are chapter 7 and chapter 13 bankruptcy. This article will discuss the merits of each and contrast chapter 7 versus chapter 13 bankruptcy.

Chapter 7 bankruptcy is the option that most people go for. It is a way to get a fresh start and effectively draw a line under your existing debts. It is sometimes referred to as a liquidation bankruptcy because all your assets are sold by the courts and the money made is handed out to your creditors.

Filing a liquidation bankruptcy may seem like a last resort (and it should be) but you will not be left high and dry by the courts. The idea of the bankruptcy is to arrive at an equitable solution for both creditors nd debtors. So your essential assets, like your home and car are generally exempt from liquidation. This ensures that you can still contribute to the community and get back on your feet quickly.

With this said, a chapter 7 bankruptcy is not as easy to take as it has been in the past. A general increase in bankruptcies and cases where the laws have been flouted have resulted in changes to the statutes. In October 2005, the chapter 7 laws were changed.

Since the changes, people have needed to be means tested to be eligible to file for chapter 7. For instance, they must have a personal income that is below the median income of the state in which they reside. Also the total assets of the person cannot be more than 25% of the outstanding debt.

Of course the new laws have some flexibility in them for exceptional circumstances. For instance, the terrible events after Hurricane Katrina resulted in many losing their homes. Anyone in the situation could file chapter 7 without the means testing.

Chapter 13 bankruptcy is also known as a repayment bankruptcy. Essentially, you are going to court to renegotiate the terms under which you repay your debts. This generally means restructuring the time frame in which you make the repayments but you may be able to renegotiate the amount of debt too in some cases.

In this form of bankruptcy you do not lose your assets but still have to pay off all your debts. The aim of taking the process to court to get relief from creditors and to make the payment schedule more equitable for you and the creditors.

The changes to the bankruptcy statutes have changed how chapter 13 is applied too. Now the schedule of repayment is worked out by a formula created by the IRS rather than a court appointed trustee.

In short, chapter 7 liquidates your assets but clears you debts. Chapter 13 renegotiates the way you pay off your debts but you will not lose any of your assets and will stop receiving calls from creditors. Both have there place depending on your circumstances and whether you are eligible.