Filing for bankruptcy is a stressful financial decision, and it can be confusing to determine which type of bankruptcy is best for your situation.
Based on your circumstance, filing for the right type of bankruptcy can help you get back on your feet financially.
By familiarizing yourself with the different types of bankruptcy, you can be prepared to make the right decision when you go to file.
Table of Contents:
Chapter 7 vs. Chapter 13
To start off, what is bankruptcy? Bankruptcy is the legal process of a judge or court trustee reviewing someone’s assets to determine if they have enough resources to repay their debts. It is designed to give people a second chance when their finances collapse.
Chapter 7 and Chapter 13 are the two most common types of bankruptcy and are typically what come to mind when talking about personal bankruptcy.
Both types relieve the legal obligation to repay a debt, known as bankruptcy discharge.
However, one may be better suited from your situation than another based on income, owned assets and time needed for completion.
Chapter 7, also known as liquidation bankruptcy, is the most popular form of bankruptcy. Through Chapter 7 bankruptcy, a court-appointed trustee is assigned to determine the equity of your assets, which is the value of the property minus the amount owed.
Your assets are then liquidated, and the profits are used to pay off a portion of your debt. After your assets are liquidated and creditors are paid, you receive a court judgment that releases you from responsibility for repaying the remainder of the debt.
The process to file through Chapter 7 takes anywhere from three to six months. It is usually much quicker than filing through Chapter 13. The majority of the time is spent determining which of your assets are deemed exempt or non-exempt.
When the court-appointed trustee reviews your assets, they determine which assets are necessary for your overall well-being. For instance, your home and a car that you use to get to work are exempt from liquidation. Jewelry, designer clothes or vacation home are considered non-exempt and would be subject to liquidation.
Exemptions can vary from state to state (a car may be considered non-exempt in New York City vs. Los Angeles.) You may choose to follow state or federal property exemption laws, which may allow you to keep more of your possessions.
Chapter 7 bankruptcy is ideal for people who do not have any consistent income to repay debts. If you do not have a job and have little to no assets, this may be the best form of bankruptcy for you to file.
Chapter 13 bankruptcy is referred to as the repayment plan. It is the second most popular type of bankruptcy, and it involves making payments on your debts throughout a grace period of three to five years. When the grace period ends, the rest of your debt is discharged by the court.
A judge or court-appointed trustee determine a repayment plan for you based on your income, expenses, and value in assets. In order to qualify for Chapter 13, your debt must not exceed a certain limit set by the court. Be sure to consult a lawyer for the most up-to-date limits.
Someone might choose to file Chapter 13 because it does not require liquidation of property to repay debts. Rather, you make monthly payments set by the court and are allowed to keep all of your personal property.
Chapter 13 also protects any co-signers on any loans, whereas Chapter 7 does not.
Filing Chapter 13 is best if you have a steady income with which to make payments. If you are able to make payments but simply need to buy some time, this may be the ideal form of bankruptcy for you.
Other Different Types of Bankruptcy
While Chapter 7 and Chapter 13 are the most common types of bankruptcy, there are many types of bankruptcy that can apply to a variety of scenarios.
Below are some important but lesser-known forms of bankruptcy code:
Chapter 9 bankruptcy applies to cities or towns. This type of bankruptcy protects municipalities from creditors while a city develops a plan to deal with their debt.
A city may file for Chapter 9 if an industry closes and people leave to find work in other cities. The most well-known example of a city filing for Chapter 9 is Detroit, which is the largest city to ever file for Chapter 9 bankruptcy.
Sometimes referred to as “reorganization bankruptcy,” Chapter 11 bankruptcy applies to businesses that need to restructure their operations without closing their doors.
While the business remains in operation, the majority of the decisions are made with permission from the court. This type of bankruptcy is typically for larger organizations, but it can be filed by businesses of any size.
For instance, a large department store chain may file Chapter 11 while they restructure the business to include more robust online shopping capabilities.
Chapter 12 bankruptcy allows family farmers to propose a plan to repay all or part of their existing debts. This form of bankruptcy is very similar to Chapter 11 because the farmer is allowed to remain operational while making payments to lower debt.
Because of the seasonal nature of these professions, allowances are made for when a person can make payments on their debt. However, all payments must be completed within five years of filing.
There are restrictions for who can qualify for Chapter 12 based on annual salary as a farmer. Your debt cannot exceed $4.03 million for farmers or $1.87 million for fisherman.
Chapter 15 bankruptcy is a fairly obscure form of bankruptcy that involves debtors with debts in the US and abroad. It is a way for foreign creditors to gain access to the US Bankruptcy Courts and sue their debtor for repayment.
These cases typically start as insolvency cases in foreign countries and make their way back to the US. This is a fairly recent addition to bankruptcy code. It was added as a part of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005.
What Type of Bankruptcy Is Best For Me?
If you are dealing with personal debt, Chapter 7 or Chapter 13 are likely your best options. These are the most common filings for credit card debt, medical bills, personal loans or periods of unemployment.
You should consider filing Chapter 7 if you are unable to make monthly payments and have few assets that could be subject to liquidation. Chapter 13 is ideal if your debt does not exceed the limit set by the court and you have a consistent income.
Before filing for bankruptcy, consult a professional who is familiar with bankruptcy code, such as an attorney. They can help you identify which form of bankruptcy best fits your financial circumstance.
Bankruptcy laws are highly nuanced and tricky to navigate. It can be easy to get lost in the subtext. That’s why you should always consult an attorney when you go to file bankruptcy.
While it’s best to familiarize yourself with the types of bankruptcy, a lawyer can help you determine which is best based on the condition of your finances.