Latest News 2017 February The 3 Different Bankruptcy Types (& Which You Need)

The 3 Different Bankruptcy Types (& Which You Need)

Bankruptcy, despite its reputation, is a fundamental part of a consumer's arsenal. As the economy grows, it's important for people to have the ability to free themselves from overwhelming debt. Just like banks need assurances that their loans will be paid back, you need assurances that your debts will not override your basic human rights.

Bankruptcy law is that assurance. Bankruptcy law sets the terms, limits, and processes by which people can free themselves from collectors and lenders. Fortunately, there are multiple paths you can take to wipe your financial slate clean. Today's blog is about helping you understand the basics of each one.

Some quick vocabulary for readers who are new to bankruptcy terms:

  • Unsecured Debt – Any debt that is not "secured" to any actual property. This would include medical debt, credit cards, and any personal loans without collateral.
  • Secured Debt – Any debt that is tied to property that can be repossessed. Your car and your home are likely the largest pieces of secured debt you have.

Read below to learn more about which bankruptcy form is right for you!

Chapter 7 Bankruptcy: The Liquidation Bankruptcy

Chapter 7 bankruptcy is the quintessential bankruptcy format. When people visualize the word "bankruptcy," they're usually thinking of a Chapter 7—and for good reason, as they make up 70% of all bankruptcy filings by individuals.

This filing format works by allowing debtors to sell their belongings to pay off creditors as much as possible. Whatever unsecured debt that isn't covered by the sale proceeds is discharged—that is, you are no longer obligated to pay it back.

For secured debt, Chapter 7 filers have 3 options. They can:

  • Allow secured debt to be repossessed
  • Arrange a payment plan with lenders
  • Pay for the replacement value of the item in a lump sum

The good news about Chapter 7 bankruptcy is that you are not obligated to sell all your belongings. Certain items are considered exempt by law—you are able to keep your clothing, furniture, household necessities, your home, your primary vehicle, heirlooms, and any pensions or insurance policies. Essentially, anything that would jeopardize your present or your future is not for sale.

Your exempt items will vary according to your state's laws, so check with a local bankruptcy attorney to find out what assets you can keep. States also give debtors minimum equity in their cars and homes to protect them from falling deeper into financial ruin. For example, one state entitles debtors to $16,000 of equity in their home—meaning if their home is foreclosed, they get to keep $16,000 of the value.

If you choose Chapter 7, it will take 3 to 4 months for it to resolve.

Chapter 7 Is Best For…

  • Unemployed debtors with very few assets
  • Unemployed homeowners who owe more on their home than it's worth

Chapter 13 Bankruptcy: The Wage Earner's Relief

Chapter 13 bankruptcies allow filers to consolidate their debt and draft a 3- or 5-year repayment plan. The repayment plan will be based on their disposable income, which includes any income not required for food, shelter, or transportation. Once the repayment plan concludes, any outstanding debt is discharged.

If you want relief from collection agencies and creditors without selling your belongings, Chapter 13 might be an ideal option for you. It puts all of your debt in the care of a trustee, who works with your creditors to set the terms of the repayment plan. All your debt—including past-due payments and missed mortgage payments—are included in the consolidation.

Aside from not requiring you to sell your assets, the primary advantage of Chapter 13 filing is that it halts all attempts to foreclose or repossess your secured debt. It forces creditors to make a deal with you to allow you a chance to pay them back. At the very least, it gives you some breathing room if you're about to lose your home, car, or other major assets.

Chapter 13 Is Best For…

  • High income earners
  • Salaried employees
  • People with low costs of living
  • Unemployed homeowners with high equity
  • Employed homeowners facing foreclosure

Chapter 11 Bankruptcy: For Businesses & High-Asset Individuals

Chapter 11 filing allows businesses and high-asset individuals to reorganize their holdings to pay off creditors. Reorganization is the alternative to liquidating assets, which would cripple a business or a person with high-value holdings. The process has a time limit of 120 days, but during that time the debtor will be able to set terms of repayment and ensure continued operation of their business.

Because it is deeply complex, most individuals have no use for a Chapter 11 filing—it doesn't do anything that couldn't be done in a Chapter 13. However, if you make too much money for a Chapter 13 or you want to keep a high volume of your assets, Chapter 11 may be the ideal option for you.

Chapter 11 allows businesses and households to maintain ownership of all their assets because it has a much higher debt and income ceilings. For people who have incredibly high amounts of debt—common for many entrepreneurs—this is what makes Chapter 11 the bankruptcy of choice. In rare cases, an individual who is ineligible for Chapter 13 might be forced into a Chapter 7 bankruptcy. In these cases, that person could then convert the Chapter 7 process into a Chapter 11.

Chapter 11 Is Best For…

  • Wealthy petitioners with a large amount of debt
  • People who want to convert a Chapter 7 into a Chapter 11
  • Businesses and business owners
Categories: Bankruptcy Basics