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.

Having said this, a liquidation or chapter 7 bankruptcy is not as straightforward as it used to be. The rise bankruptcy claims and instances where people were abusing chapter 7 prompted some changes to the laws. In October 2005, the chapter 7 laws were changed.

Part of the changes to the law have included means testing for people to be eligible to file for chapter 7 bankruptcy. They must have an annual income that is below the median of the state in which they live. And they cannot have assets that total at least 25% of the total debt.

There are allowances for exceptions to the new ruling, so that people in unusual circumstances are not unfairly disadvantaged by the changes. For instance, the people that suffered during Hurricane Katrina were given special considerations allowing them to start again after flooding had destroyed their homes.

Chapter 13 is not as common. It is effectively going to court to ask for help in renegotiating your debts. Renegotiating generally means restructuring the time you have to pay off the debts and getting any creditors off your back. In some cases you can also renegotiate the size of the debt.

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.

Chapter 13 has also changed since the revision of the bankruptcy laws. Before the changes the court appointed trustee would work out the payment schedule. Now it is derived by a formula created by the IRS.

Both chapter 7 and chapter 13 bankruptcy have their place in getting people out of financial difficulties. Chapter 7 can help you start a fresh but you will lose most of your assets. Chapter 13 lets you pay off your debts without being harassed by creditors. It makes the debt more manageable.