Did you know that in the US, the total number of bankruptcy filings in 2020 amounted to 544,463?
Is this a situation you’ve heard of before? You’re sitting at your desk, your head in your hands, looking down at a stack of bills and notices, unsure how you’ll make it all work? Perhaps you’ve just been made redundant, or you have fallen ill, and your debts have been piling up. But, then, you have a light bulb moment; I can file for bankruptcy!
But when you finally get into it, there are many types of bankruptcy that make you feel hopeless. So, we understand that you may feel frightened and trapped, but you can’t take bankruptcy lightly.
You need to know precisely what bankruptcy is and what different types of bankruptcies there are. So let’s learn more about Chapters 7, 13, and 11 bankruptcy in this tutorial.
Definition of Bankruptcy
Bankruptcy is a legal process used when a person or company is unable to pay its financial obligations. The bankruptcy procedure starts with a petition to the Federal Court, usually by the debtor. In a reorganization, a payment plan is presented and approved and in a liquidation, the court determines if any of the debtor’s assets should be sold to pay off some of the debt.
What Are the Different Types of Bankruptcies?
While bankruptcy is intended to discharge debt, not all bankruptcies are the same. There are six kinds of bankruptcies:
- Liquidation – Chapter 7
- Repayment Plan – Chapter 13
- Large Reorganization – Chapter 11
- Family Farmers – Chapter 12
- Used in Foreign Cases – Chapter 15
- Municipalities – Chapter 9
These choices may confuse you, but, more than likely, you will only use one of three: chapter 7, Chapter 13, and Chapter 11. Therefore, we will concentrate on these three types of bankruptcy.
Let’s Look at Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often known as straight or liquidation bankruptcy, is the most frequent form of personal bankruptcy filed.
The liquidation to pay off your creditors is overseen by a court-appointed trustee. Any unsecured debt, such as credit cards or medical expenses, is usually written off.
Now, based on the jurisdiction in which you reside, the court will not compel you to sell certain items. For example, most individuals may keep their homes, cars, and retirement funds while filing Chapter 7 bankruptcy.
Chapter 7 may only stall a foreclosure. If you still owe money on anything used as collateral for a loan, you must renew loan arrangements and make payments. But most Chapter 7 bankruptcies are no property-sold cases known as no-asset.
You may only declare Chapter 7 bankruptcy if the court determines you can’t pay your debts. This results in an examination of your specific household budget and an objective budget known as the “means test.” The test compares your salary to the state average and examines your accounts to see whether you have enough spare income to pay off your creditors. If your income is too low, you will be eligible for Chapter 7.
Chapter 7 bankruptcy remains on your credit record for ten years, but rarely affects you for that long. You can file another Chapter 7 bankruptcy, but only after eight years from the first case.
What Is Chapter 13 Bankruptcy?
Instead of wiping off debt, Chapter 13 bankruptcy restructures it and forgives some of the debt and you pay some of the debt through a single payment monthly to an officer of the Bankruptcy Court. The court authorizes a monthly payment plan to pay off some of your unsecured debt and all your secure debt over 3 to 5 years. The monthly payments are based on your income and debt.
Chapter 13 bankruptcy enables you to retain all of your property and repay any debt secured by collateral. Chapter 13 may also halt a foreclosure and provide you with more time to pay off payment lapses on your mortgage.
There are limits to amount of debts you can owe and filed for Chapter 13 bankruptcy. The currently limitations are $419,275 in unsecured debts and $1,257,850 in secured debts. In addition, you must have your tax returns filed up to date.
You should also be aware that a Chapter 13 bankruptcy will remain on your credit record for 7 years and that you will not be able to file for bankruptcy again until 2 years have passed.
Filing Chapter 11 Bankruptcy
When a company or corporation files for Chapter 11 bankruptcy, it is often done to restructure it. Businesses must develop a strategy for how they will continue to operate the business while paying off their debt.
This plan must be approved by both the court with input from the creditors to be effective. Some people who have too much debt to qualify for Chapter 13 may choose to apply for Chapter 11 bankruptcy protection rather than Chapter 13. This is because they may owe debts above the Chapter 13 debt limits.
Which Type of Bankruptcy Is the One For You?
Most individuals seek protection under Chapter 13 or Chapter 7 so let’s look at a comparison of these two. The primary distinction between Chapter 7 and Chapter 13 bankruptcy is a payment plan.
Chapter 13 is designed to protect assets such as a house or a vehicle if the loan is behind. Chapter 7 does not have a function to cure arrears in a secured loan.
Chapter 13 can address certain tax liabilities that would not be forgiven in Chapter 7. Chapter 13 is also used if there are excess funds in the household budget that would disqualify one from a liquidation under Chapter 7.
Know the Consequences of Filing For Chapter 7 and 13 Bankruptcy
Bankruptcy can seem scary and selecting between Chapter 7 and Chapter 13 can feel like choosing between two evils. Both Chapter 7 and Chapter 13 are a means to fix a broken financial situation.
You will have to provide a substantial amount of information to your lawyer and the Bankruptcy Court. You will have to attend a hearing before a Chapter 13 or Chapter 7 Trustee.
If you file a Chapter 13 reorganization, you will be required to make monthly payments for at least 3 years. If you filed for protection under Chapter 7, it is crucial to make certain all of your valuable assets are exempt and protected or the Chapter 7 Trustee can sell these assets to pay a portion of your debt.
Take Charge of Your Finances One Step at a Time
As we have shown above, there are many different types of bankruptcy. However, bankruptcy is not always the magical formula that will solve all your difficulties.
Bankruptcy can only address a debt load. It will not create income and the cases that fail in reorganization is usually because the individual does not have sufficient income to protect their assets. You should consider your options carefully and only proceed with, or eliminate bankruptcy as an option after a consultation with a qualified attorney. To schedule a consultation to evaluate your options contact us and set up a free and confidential consultation to get you started on your road to financial recovery!