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New rulings may expand Chapter 13 bankruptcy

Bankruptcy can be an ugly term; even the direct meaning is an unpleasant allusion to "breaking the bank." But eligibility for different types of bankruptcy and successfully declaring it should not be a defeat. In a way, it is a chance to start over.

The two most common types of personal bankruptcy offer options to people in different types and severities of debt. Chapter 7 bankruptcy, usually known as liquidation, allows a person to settle most or all of their debts by raising money with assets and property. Chapter 13, sometimes called a "wage earner's plan," allows people with steady income to settle debts without liquidation.

United States bankruptcy law generally allows people to apply for Chapter 13 if they have less than $394,725 in unsecured debt. Bankruptcy courts had offered different and often conflicting rulings on whether or not a person may declare Chapter 13 bankruptcy if significant student loans raise a person's debt above this amount.

A bankruptcy judge who recently ruled on this issue claimed in her determination that the decision "should be made on a case-by-case basis considering the best interest of creditors and the bankruptcy estate." Judges who agree with this approach may allow a student or former student to avoid liquidation in bankruptcy with greater debt if it helps both creditor and debtor.

People facing bankruptcy who may apply for Chapter 13 may avail themselves of legal representation. An attorney's counsel may increase the chances of a judge approving a petition for bankruptcy that favors the person with the opportunity to retain assets and possessions.

Source: Mondaq, "Courts Expand Eligibility For Chapter 13 Bankruptcy Of Persons Seeking To Discharge Outstanding Student Loans," Amir Shachmurove, Timothy St. George & David N. Anthony, May 15, 2018

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