Many people find filing for bankruptcy to be extremely difficult.
It isn’t so much the actual act of filing a bankruptcy and proceeding with it, though that certainly has its challenges. For many people, the difficult part is admitting that they would benefit from bankruptcy in the first place.
If you are facing debts that you can’t seem to escape, then it may be time to consider bankruptcy.
For one thing, it will help you to eliminate some of those debts that are crushing you. For another, the very act of filing bankruptcy makes it so your creditors stop harassing you and stops all negative reporting on your credit.
This alone can be incredibly valuable, as it is nice to no longer screen your phone calls for creditors.
But not every bankruptcy type is the same. There are several different bankruptcy “chapters,” and it is vital that you pick the one that is best for you. That’s why we’re turning our attention to the various kinds to see which bankruptcy option is right for you.
We’ll explore how Chapter 7 and Chapter 13 work since they are the most common types of bankruptcy. Then we’ll look at the other chapters for contrast.
What is the Chapter 7 Bankruptcy Process?
Chapter 7 is often referred to as a liquidation bankruptcy.
This is because when you file for Chapter 7 requires the liquidation of your assets in order to pay off as much of your debt as possible before dismissing it. Now, there are a few catches.
For one thing, not all of your assets are liquidated.
There are strict rules about what types of assets can be liquidated and what can be kept. For some people, this can mean that they have no issue keeping the things that matter the most to them, like their house and their vehicles. But for others, it could mean losing a lot, and this brings us to another key point.
You probably aren’t the one that is going to be in control of the process.
When filing for this bankruptcy chapter, the court appoints a trustee to run the process. It is up to the court appointed trustee to ensure that the law is followed, which means that your assets are liquidated in order to pay off your creditors based on the priority of the debt.
While a Chapter 7 requires the selling of assets, it often results in your remaining debt being forgiven. There are limits on what debts can be forgiven, of course, but this is true regarding most forms of bankruptcy.
What is a Chapter 13 Bankruptcy?
When you file for Chapter 13, your finances are completely reorganized. This requires compiling a list of all of your creditors, your properties, your income, where it comes from, and all sorts of information about your monthly bills and expenses.
This information is all used in order to create a plan for repayment based on the debtor’s ability to pay. This is often called a wage earner’s plan.
How Long is the Repayment Plan?
The plan for repayment will require you to pay off certain debts within three to five years through a monthly payment.
A monthly payment might not sound as nice as having your debt forgiven but note that you aren’t liquidating your assets with a Chapter 13. This does require you to have a source of regular income, though.
One of the biggest advantages of this Chapter is that, in most cases, you should be able to keep your property.
So long as you continue to make your payments, you will be shielded from creditors. This means that you could use Chapter 13 to stop a pending foreclosure or pay off unsecured debts like medical bills.
What are the Other Types of Bankruptcy?
While Chapter 7 and Chapter 13 are the most common, that doesn’t mean they are the only ones. However, you will find that the bankruptcies we look at in this section are quite specific. As such, the amount of people that could claim one of these bankruptcies is going to be fairly limited.
Chapter 9
Chapter 9 bankruptcies aren’t for individuals. These bankruptcies are for municipalities and governmental units like schools. A repayment plan is created, and finances are reorganized in a similar manner as Chapter 13.
Chapter 11
Chapter 11 bankruptcy is primarily used by businesses or corporations. The business comes up with a plan for how to keep the lights on while they are paying creditors the debt that is owed. Since the business comes up with the plan, both the bankruptcy court and affected creditors must approve the repayment plan.
Chapter 11 bankruptcies may be used by individuals, but those individuals must have an impressively large estate to qualify for a Chapter 11.
Chapter 12
Chapter 12 is used exclusively by fishermen and family farmers. If you fall into one of those categories, then Chapter 12 will most likely be the way you’ll want to go. Chapter 12 bankruptcies are quite flexible, and they offer higher debt limits compared to alternative options.
Unfortunately, qualifying for bankruptcy Chapter 12 often just isn’t an option.
Chapter 15
Chapter 15 can be quite confusing because it deals with international bankruptcy. Basically, it is a way for foreign debtors to use our court system. The average American citizen is going to have no reason to ever interact with Chapter 15.
How Do I Pick the Bankruptcy That’s Right for Me?
With so many different options available, it can be difficult to decide which is the right one for you. In some cases, you won’t have any choice and you will only be able to proceed with a particular Chapter.
But if you have the option to choose between multiple Chapters, it is important that you carefully consider the implications of each choice. These can be powerful tools but can also be detrimental if not carefully considered.
It can allow you to take control of your financial situation and get back on your feet following a hard period. But, like any tool, it can also do more harm than good if it is used haphazardly.
The best way to be sure that you pick the right option is to work with an experienced bankruptcy attorney who can advise you on everything you need to know, as well as anything relevant to your unique financial situation.
