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Dave Says: Major differences between Chapter 7, Chapter 13 bankruptcy

Published: Sunday, Aug. 3, 2014 5:30 a.m. CDT

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

Dear Dave,

Do you think it’s unreasonable to ask my 76-year-old husband to have a will drawn up? He had one made when we lived in Florida, but we moved to Georgia. He won’t do it, because he says wills aren’t recognized in Georgia.

– Cam

Dear Cam,

Wills aren’t recognized in Georgia? Where did he get his legal advice, in a bar or pool hall?

OK, let’s straighten this out. The will he had drawn up in Florida wouldn’t be recognized in Georgia, but he could have one made in Georgia that would be absolutely valid and legal.

Everyone: No matter where you live, you need a will. If you die without a will in place, your family has to go through the court and jump through all sorts of hoops to settle the estate.

The process can take several months. No one should leave their loved ones in that kind of predicament, when having a will drawn up is such a simple and inexpensive process.

Everyone needs a will, Cam. Human beings have a 100 percent mortality rate, OK?

No one is getting out of this thing alive. You need a will, a full estate plan with specific instructions on what to do with all your stuff after you die.

– Dave 

• Dave Ramsey is the author of five New York Times best-selling books: “Financial Peace,” “More Than Enough,” “The Total Money Makeover,” “EntreLeadership” and “Smart Money Smart Kids.” Follow him on Twitter at @DaveRamsey and on the web at daveramsey.com.

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