Bankruptcy is a legal process that allows individuals or businesses to resolve their outstanding debts and obligations. It can be a difficult and overwhelming decision, but it can also offer a fresh start for those struggling with financial issues. There are 3 types of bankruptcies, each designed to address specific financial situations. In this blog, we will explore the 3 types of bankruptcies: Chapter 7, Chapter 11, and Chapter 13. Understanding the differences between these options can help you make the best decision for your financial future.
Basics of Bankruptcy
The most common bankruptcies are in Chapters 7 and 13. Both can be filed by anyone, but Chapter 7 must be met. Chapter 11 bankruptcy is also quite common. This type of bankruptcy can be filed by individuals and businesses. Because Chapters 9, 12, and 15 are for municipalities, family-owned farms, fishing operations, or bankruptcies involving entities from multiple countries, fewer debtors file them.
Debtors who file for protection under bankruptcy law eventually want their debts to be discharged. A discharge is a court order that the debtor does not have to pay the debt. Only certain debts are eligible for discharge. For example, liens on collateral like homes and autos cannot be discharged by bankruptcy. After filing for bankruptcy, you can’t get rid of any debts that you have accrued.
The first step to filing for bankruptcy protection is to submit a petition at their local federal bankruptcy court (all bankruptcy matters are handled in the federal court). Filing a bankruptcy petition requires that the debtor submit many forms and provide detailed information about their financial situation. This includes income statements, tax returns, and statements regarding bank accounts. Pre-bankruptcy debtors must also take credit counseling courses and pre-discharge education courses from approved providers.
The debtor must meet with creditors and a court-appointed administrator to answer questions about his ability to repay the debts. Because Section 341 of The Bankruptcy Code mandates it, this meeting is known as a 341 meeting. The discharge is finally granted after a period of time that can vary depending on which of these 3 types of bankruptcies you have chosen and the agreement.
Some benefits are available sooner than others. Filing for bankruptcy immediately stops creditors from making further calls, letters, or attempts to collect most debts. However, bankruptcy can have a lasting impact. Bankruptcy may remain on your credit report for up to a decade. This can make it more difficult and expensive to get credit.
This is just a brief description of bankruptcy. Much of the process will depend on which chapter you choose. It is important to understand your options and goals before choosing the right chapter. Below are details on 3 types of bankruptcies.
Chapter 7 Bankruptcy
Chapter 7 can also be referred to as liquidation bankruptcy, as it requires that most assets of debtors are sold to creditors. Nearly all Chapter 7 filers receive at least part of their debts discharged. Individuals and businesses can use it.
Pros and Cons
Chapter 7 is the fastest way to bankruptcy. The process of filing a Chapter 7 bankruptcy petition can take less than four months, from the filing date to the final resolution. This is due to the fact that there is no repayment plan. Unlike Chapter 13 bankruptcy which may require three to five years of regular payment before debts can be paid off.
Filers who file Chapter 7 may be allowed to keep personal property exempted from liquidation. The exemptions are determined by the state and allow debtors to continue working and living. Automobiles, clothing, and furniture, as well as pensions and some equity, may be exempt. Most Chapter 7 filings are no-asset, meaning that all assets of the debtor are exempt.
Reaffirmation, a Chapter 7 tool that allows debtors some flexibility, is an effective Chapter 7. A debtor can either reaffirm the secured debt or agree with the creditor that they will pay all or part of the amount owed. This tool allows the debtor to keep, for example, a car or home that would otherwise need to be sold.
Chapter 7 has one major drawback. You will have to sell property that bankruptcy won’t allow you to keep (nonexempt assets). Chapter 7 also has a drawback: co-signers could still be held responsible for their share of the debt. Creditors can still pursue your cosigner even if you are no longer able to do so. You can only file Chapter 7 once in eight years.
Not everyone can file for Chapter 7 bankruptcy. Your current monthly income (average monthly earnings for six months before bankruptcy) must be lower than the median income of your household in your state. A Chapter 7 petitioner with too much income may be rejected by the court.
Are You a Good Candidate?
Chapter 7 may not be the best option. However, creditors can always reach out to them for help. Credit counselors are available to help you design and negotiate debt repayment plans, without having to resort to bankruptcy.
Chapter 13 Bankruptcy
This chapter is known as a wage earner’s plan. This allows a debtor to keep more property while paying off debts over a longer time period, usually three to five years.
Pros and Cons
Chapter 13 allows filers to protect their homes from foreclosure. This bankruptcy stops foreclosure and allows debtors to catch up on their mortgage payments. You can also restructure other debts to make it easier for the borrower to repay them.
A special provision in Chapter 13 can protect co-signers. Like Chapter 7, creditors must cease trying to collect debts after the petition is filed. Chapter 13 allows debtors to make payments to a trustee who then distributes funds to creditors. This means that debtors are not required to contact creditors during payments.
Chapter 13 has one drawback: the debts must still be paid. And it takes longer than Chapter 7. It usually takes at least three to five more years before the payment plan ends and the court discharges the debts.
Are You a Good Candidate?
After meeting with creditors, the debtor must submit a repayment plan. The court will then approve the plan at a hearing. The plan will require regular payments, often monthly. The debtor must begin making payments within 30 calendar days even if the plan isn’t approved yet. If you need your debts discharged sooner, consider Chapter 7.
Chapter 11 Bankruptcy
Chapter 11, also known as reorganizing bankruptcy or business corporations, is often associated with partnerships and businesses. Individuals in business, such as sole proprietors, can also file a Chapter 11 petition. Chapter 11 is similar to Chapter 13 and it also includes a repayment plan.
Pros and Cons
Chapter 11 allows a business to continue to operate while its debts are restructured and creditors are paid over time. This is a significant plus for the filer, and often for creditors who might otherwise have no prospect of repayment.
Chapter 11 filings can be the most complicated, expensive, and time-consuming. A Chapter 11 filing is typically used by major corporations to seek bankruptcy protection. These fees can be much higher than the attorney fees and Chapter 11 cases can take years to resolve.
Chapter 11 cases seldom have a trustee. The trustee is the filer, also known as the debtor-in-possession. The debtor in possession continues to operate the business and works closely with creditors to develop a repayment plan. To approve the plan, a majority of creditors must vote.
Are You a Good Candidate?
Chapter 11 is a good option for corporations and partnerships. Two special categories are available for small businesses that can file Chapter 11 applications.
How to Choose the Right Type of Bankruptcy
The debtor can choose which chapter to file under. It all depends on your needs.
Chapter 7 is the best option for people with low incomes and little assets who want to get things done as soon as possible. However, those who wish to file under Chapter 7 must meet a means test. The court can deny you a Chapter 7 liquidation petition if you earn too much or change it to Chapter 13 bankruptcy.
If you want to keep as much of your possessions as possible and have the income to pay off the debt, Chapter 13 might be a better option.
Businesses that want to remain in business might consider Chapter 11.
In complex cases, many filers are represented by bankruptcy lawyers who help them make the right decision about filing. Referrals to qualified lawyers can be made by professional organizations such as the National Bar Association and your local bar association. Personal recommendations from family members and friends can also be helpful. Contact your local legal aid society if you have limited funds to find an affordable lawyer.
The 3 types of bankruptcies – Chapter 7, Chapter 11, and Chapter 13 – offer individuals and businesses different solutions to their financial difficulties, and it’s important to understand the pros and cons of each option before making a decision. The decision to file for bankruptcy protection may have long-lasting ramifications. This can lead to significant financial and time investments.
You will get the most benefit with the least pain if you take the time to read the chapters and choose the one that best suits your situation. Consider all your debt relief options and learn more about the 3 types of bankruptcies before you file for bankruptcy.
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At Tenina Law, we understand that the process of filing for bankruptcy can be stressful and overwhelming. That’s why we strive to provide our clients with the support and guidance they need to navigate this complex legal process. Our team of experienced bankruptcy attorneys has the knowledge and expertise to help you understand your options and make informed decisions about your financial future.
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If you’re struggling with debt and considering bankruptcy, we encourage you to reach out to Tenina Law for a free consultation. Our lawyers will take the time to listen to your unique situation and provide personalized advice and recommendations. We’ll work with you every step of the way to ensure a positive outcome, and we won’t rest until you achieve the financial stability you deserve. Contact Tenina Law today to schedule your consultation.