When you have trouble paying your bills, deciding to file for bankruptcy can be the first of many steps on your path to a better future financially. Next, you must determine what type of bankruptcy to file based on your situation, debts and plans for the future.
The most common types of bankruptcy are Chapters 7, 11 and 13. Knowing the difference between these 3 chapters is a lot like reading a textbook. It takes some time to digest all the information and learn the facts.
To save you the time and frustration of muddling through tons of information online, we’ve created this blog post as an easy reference to understand the definitions of each chapter of bankruptcy.
Chapter 7 is a form of liquidation bankruptcy and is often referred to as “straight bankruptcy.” What makes it a straight forward form of bankruptcy is its ability to allow debtors to get rid of unsecured debts quickly, meaning debt like personal loans or consumer debt.
Once debtors discharge those debts, they will not have to participate in an extensive repayment plan. This characteristic of Chapter 7 makes it a faster process in most cases than Chapter 11 or 13. However, things get more complicated with debtors who have a mortgage, liens or have used their home or car as security for a loan. In this scenario, the individual would have to keep up payments or surrender the items.
Chapter 11 is often used by businesses but can be used by individuals as well. It differs from Chapter 7 in that it allows debtors to pay back debts over a period of time and restructure them, rather than discharging them quickly. This element is advantageous to organizations that want to remain in operation.
However, any repayment plan must be approved by the board of directors of the company and the courts. Businesses look to Chapter 11 when they are unable to reorganize with Chapter 13 and want to remain in operation, which is not permitted with Chapter 7.
Chapter 13 proceedings can last up to 5 years as individuals are required to use their future income to pay off all or some of their debts. People often look to a repayment plan like Chapter 13 when they are able to pay some of their debts or want to avoid a foreclosure on their home. Individuals make payments to discharge those debts through a period of 3 to 5 years in installments.
It’s important to realize that if your debt is too high and/or your income too low, you may not be eligible for Chapter 13. This form is also referred to as a “wage earner’s plan,” as it is most favorable to individuals with a higher disposable income.
Once the court approves the repayment plan, an automatic stay is issued. This means that while the plan is in place under the Chapter 13 filing, creditors must halt any collection actions.
While a general understanding of the different chapters of bankruptcy is helpful, your efforts are best invested in finding an experienced bankruptcy attorney. An attorney who specializes in bankruptcy law can help you make sense of proceedings and determine the most appropriate chapter for your situation.
We understand how complicated and frustrating the bankruptcy process can be, no matter the chapter or situation at hand. To discuss bankruptcy chapters and how to move forward, schedule a free consultation with Tyler, Bartl & Ramsdell, P.L.C. by calling 703.549.5001 today.