First, the names of the different categories of bankruptcy are derived from the bankruptcy code chapters in which they are located.
The Chapter 7 bankruptcy is a liquidating bankruptcy. Under chapter 7, a trustee will liquidate all non-exempt assets and use the proceeds, minus his fees, to repay creditors. According to Arizona's rather indulgent exemption laws, a debtor is able to retain the majority of his property, which is, to say the least, unattractive. All unsecured debts will be discharged under chapter 7, and the debtor will emerge from the bankruptcy procedure completely debt-free. Non-secured debt consists of credit card debt, medical expenses, and unsecured loans. Student loans, delinquent taxes, and secured loans such as mortgage and car payments are ineligible for discharge.
Chapter 13 is more suitable for those with a consistent income, as debts are repaid over a three- to five-year time period. This restructured payment plan is submitted and approved by the courts by the Arizona bankruptcy attorney. This enables the debtor to retain ownership of his assets. The cram-down is a very potent tool described in Chapter 13. The code permits the modification of secured debts owed to creditors in chapter 13 cram down cases. It operates in this manner. If, for example, my car is only worth $5,000, but I owe $10,000 on it, I will only be required to pay $5,000 under chapter 13 bankruptcy. The remainder of the debt will be discharged, so it is """"crammed down"""".
The snag with the cram down is that it can only be applied to vehicles acquired more than two and a half years prior to filing. Additionally, the compress down cannot be applied to primary residences. However, it can be used for second residences, rental properties, and virtually every other type of secured debt.""
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