what is the difference between chapter 13 and chapter 7 bankruptcy?

chapter 7 wipes out debt entirely. chapter 13 lets you keep more assets and pay some debt off over time.

In some cases where only one spouse has debts, or one spouse has debts that are not dischargeable, it might be advisable to have only one spouse file. You must be careful about filing separately if, as a couple, you own joint debt and property.

In a Chapter 7 bankruptcy, your assets (minus those exempted by your state) are liquidated and given to creditors, and many of your remaining debts are cancelled, giving you what's known as a "fresh start." In 2004, over 1.1 million people filed for Chapter 7, accounting for roughly 72 percent of non-business bankruptcies.

Since many Chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors sometimes get nothing.

In a Chapter 13 bankruptcy, you're put on a repayment plan of up to five years. Any debts not addressed by the repayment plan don't have to be paid. Last year, there were 445,574 Chapter 13 filings.

Under the new law, fewer people will be allowed to file under Chapter 7; more will be forced to file under Chapter 13.

Lawmakers who favor the new law argue that it will prevent consumers from abusing the bankruptcy laws – using them to clear debts that they can afford to pay.

But consumer advocates argue that the new law is a gift to creditors – particularly the credit card industry, which may receive $1 billion or more from repayment plans due to the expected increase in Chapter 13 filings, according to Robert McKinley, CEO of CardWeb.com.

Credit counseling and money management: Under provisions of the new law you must meet with an approved credit counselor in your judicial district for a 90-minute session in the six months prior to applying for bankruptcy.

And before your debts are discharged, you must attend money management classes at your expense.

(See the list of federally approved credit counselors in your area.)

A qualifying test: Under the old law, the judge could determine if your case qualifies for Chapter 7 bankruptcy.

Under the new law, your income will be subject to a two-part means test.

First, it will be subject to a formula that exempts certain expenses (rent, food, etc.) to determine whether you can afford to pay 25 percent of your "nonpriority unsecured debt" such as your credit card bills.

Second, your income will be compared to your state's median income.

You won't be allowed to file for Chapter 7 if your income is above your state's median and you can afford to pay 25 percent of your unsecured debt, said California-based bankruptcy attorney Stephen Elias. But, he said, you may be allowed to file for Chapter 13.

If your income is below the state's median but you can pay 25 percent of your unsecured debt, you may be able to file Chapter 7, but the court can still require you to file Chapter 13 instead if it believes that you would be abusing the system by filing for Chapter 7, Elias said.

Under the old law, the court had greater latitude in deciding whether debtors may file for Chapter 7 in consideration of extenuating personal circumstances.

The new law lets debtors try to make the case that theirs are "special circumstances" in which a crisis beyond their control forced the bankruptcy filing. If the court agrees, they are more likely to be allowed to file for Chapter 7, even if they don't technically qualify for it as a result of the means test.

Two weeks ago, the U.S. Trustee, which administers the bankruptcy process and enforces bankruptcy laws under the Department of Justice, said that Katrina survivors filing for bankruptcy will be exempt from the law's credit counseling requirements. And it advised courts to treat Hurricane Katrina as a "special circumstance." That should make it more likely that survivors will be allowed a fresh start under Chapter 7.

(See the hard choices ahead for Gulf homeowners.)

Determining what you can afford to pay: Under the old law, if you filed for Chapter 13, the court determined what you can afford to pay based on what you and the court deem to be reasonable and necessary expenses.

Under the new law, the court will apply living standards derived by the IRS to determine what is reasonable to pay for rent, food and other expenses to figure out how much you have available to pay your debts. The IRS regulations are more stringent, and to contest them means asking for a hearing from a judge, which can mean more time and expense, Elias said.

In a Chapter 13 bankruptcy, you're put on a repayment plan of up to five years. Any debts not addressed by the repayment plan don't have to be paid. Last year, there were 445,574 Chapter 13 filings.

Under the new law, fewer people will be allowed to file under Chapter 7; more will be forced to file under Chapter 13.

Lawmakers who favor the new law argue that it will prevent consumers from abusing the bankruptcy laws – using them to clear debts that they can afford to pay.

But consumer advocates argue that the new law is a gi