What are the Different Types of Bankruptcy?
If you are overwhelmed with debt and unable to pay your creditors, filing for bankruptcy can help provide a fresh financial start. There are several different types of bankruptcy designed for various financial situations.
The most common bankruptcy chapters that individuals and businesses can file after the advice of bankruptcy attorney include Chapter 7, Chapter 11, Chapter 13, and Chapter 12. Here is an overview of these main types of bankruptcy and the pros and cons of each option.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, sometimes referred to as liquidation bankruptcy, is the most common form of bankruptcy filing among consumers.
Discharging most or all of your eligible debt completely. This includes credit card balances, medical bills, personal loans, utility bills, etc. Wiping the slate clean provides a fresh start. Certain assets of yours that are not exempt under your state’s bankruptcy exemption laws may be seized and sold by the appointed bankruptcy trustee to help pay back creditors. This can include property such as rental properties, timeshares, luxury vehicles, jewelry, art and other valuable collections etc.
To qualify for relief under Chapter 7, you must pass the “means test” showing your income falls below median levels in your state. This looks at your average income over the last 6 months. The Chapter 7 bankruptcy stays on your credit report for up to 10 years, negatively impacting your credit score during this period. This makes obtaining financing more difficult.
The entire Chapter 7 bankruptcy process from initial filing to discharge of debts typically takes about 3-6 months to fully complete.
The pros of filing Chapter 7 are discharging most unsecured debts and getting to keep all exempt assets like your primary home, vehicle, and basic household necessities. The main con is having your nonexempt property liquidated and sold off to repay creditors. This can create financial pain if assets like rental properties, timeshares or collections are lost.
Chapter 13 Bankruptcy
According to a Ware Law Firm attorney, Chapter 13 bankruptcy involves establishing a 3-5 year repayment plan agreed to by the court.
Most debts like credit cards, medical bills, personal loans, and past due utilities can be included in a Chapter 13 plan.
Mortgages, auto loans, child support, and student loans generally cannot be discharged through Chapter 13. Monthly income is used to make payments under your Chapter 13 plan. Unsecured creditors are only paid a percentage of what is owed to them.
To qualify for Chapter 13, you must have regular income to make monthly plan payments. Chapter 13 stays on your credit report for seven years. The advantage of Chapter 13 is keeping property like a house or car while repaying a portion of debt. The disadvantage is having to stick to a long repayment plan.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is primarily used by businesses to reorganize debts but is an option for some individuals.
As the name suggests, Chapter 11 involves restructuring your debts into a repayment plan approved by the court. In Chapter 11, you can negotiate repayment terms, interest rate reductions, and which debts to repay in full.
Businesses continue operating throughout the Chapter 11 process while developing their reorganization plan. For individuals, Chapter 11 is more complex and expensive compared to other options but allows you to keep property.
Debts not included in the repayment plan are discharged through Chapter 11. Chapter 11 can allow businesses or high-net-worth individuals to restructure and reduce debts while avoiding liquidation. The downside is the cost and complexity.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy is reserved for family farmers or family fishermen with regular annual income.
Under Chapter 12, family farmers can restructure financed farmland under more flexible repayment terms to avoid foreclosure.Certain farm assets like livestock, equipment, and crops are exempt and not subject to liquidation.
The Chapter 12 repayment plan duration is three to five years. After completing payments under the plan, remaining unsecured debts are discharged.Strict eligibility requirements must be met to file Chapter 12 bankruptcy.
Chapter 12 bankruptcy provides special debt relief protections for family farmers who are facing financial hardships.
Chapter 9 Bankruptcy
Chapter 9 bankruptcy allows financially distressed municipalities like cities, towns, counties or school districts to reorganize debt.
Chapter 9 filings are very complex and must be authorized by state governments.The municipality negotiates with creditors and must develop a debt readjustment plan approved by the bankruptcy court.
Chapter 9 provides relief from creditor lawsuits while the repayment plan is developed. Municipal services and government functions can continue operating throughout the restructuring process.
Chapter 9 gives financially strapped local governments a path to restructure excessive debts and continue serving residents.
Choosing the Right Bankruptcy Option
Determining which type of bankruptcy to file depends on your unique financial situation. The advice of a Ware Law Firm in Mississippi attorney is invaluable when weighing the pros, cons, and qualifications of each option.
Be prepared to disclose your full financial picture including all assets, income sources, debts owed, and any recent transfers of property. Your attorney will then counsel you on the chapter of bankruptcy that makes the most sense for your needs and goals. Don’t struggle with unmanageable debts. Understand your bankruptcy options so you can get a fresh financial start.
