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Chapter 7 vs. Chapter 13

What's the difference between a Chapter 7 bankruptcy and Chapter 13 bankruptcy?

Dear Dave,

What's the difference between a Chapter 7 bankruptcy and Chapter 13 bankruptcy?

-Claudia

Dear Claudia,

Chapter 7 bankruptcy is what most people think about when they hear the word "bankruptcy." It's total bankruptcy, almost like dropping an atomic bomb on your entire financial picture.

Virtually all of your unsecured debt (except student loans, child support and money owed to the IRS) is wiped out. These things are not bankruptable. About 98 percent of the time, creditors of your other unsecured debt - things like credit cards and alike - get nothing. Items that are secured debt, such as your car or house, are treated a little bit differently. If you're behind on payments, you may be allowed to get current. In most cases, banks will allow you to re-sign in a process called reaffirming the debt.

Chapter 13 bankruptcy is a payment plan structured over five years. In it, you have to pay all of your secured debt. If it has a lien on it, you pay 100 percent to keep the item. You also have to pay a portion of your unsecured debt. Again - like in Chapter 7 - debt to the IRS, child support and student loans don't go away. For any other unsecured debt, you can pay a percentage of what's owed. An overall payment plan is developed, and you make those payments for five years.

I'm not a big fan of either one.

-Dave

Dave Ramsey is America's trusted voice on money and business. He's authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. His newest book, written with his daughter Rachel Cruze, is titled Smart Money Smart Kids and is out now. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.