If you are thinking about filing bankruptcy, there will be a lot of numbers involved: your income, debts, value of things you own (assets) and more. Three very important numbers will be 7, 11 and 13. They refer to the chapters of the bankruptcy code that your case may be filed under.
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What is the difference between Chapter 7, Chapter 11 and Chapter 13 bankruptcy? Here are some basics:
Chapter 7 Bankruptcy
This is often referred to as “straight” bankruptcy. Under this type of bankruptcy, most debtors are able to discharge (eliminate) their unsecured debts very quickly. Unsecured debts are debts like personal loans or credit cards where there is no collateral for the loan.
Chapter 11 Bankruptcy
This type of bankruptcy is most often used by businesses, but it can help certain individuals and small business owners as well. It allows consumers to restructure their debts and pay them back over time. It may be useful for someone who does not qualify for Chapter 13, however it is more complex.
Chapter 13 Bankruptcy
The goal of Chapter 13 is also to eliminate debts; however, it creates a repayment plan where some (or even all) debt is repaid, usually over 5 years. Chapter 13 is often used in situations where someone wants to save their home from foreclosure, or where they can afford to pay some of their debt but not all of it.
Chapter 7 vs. Chapter 11 vs. Chapter 13
Chapter 7 is faster. In many cases, this type of bankruptcy case can be completed in less than a couple of months. Chapter 13 cases, on the other hand, cannot exceed five years and usually last that long. There is no time limit on Chapter 11 plans.
Both Chapter 13 and Chapter 11 may allow you to keep certain assets you may lose under Chapter 7. (In reality, many bankrupt individuals get to keep most or all of their property under either type of case because what they have left after trying to stay afloat financially is “exempt” — or safe — under state or federal law.)
But there are situations where you could lose certain property under a Chapter 7 that you can keep in a Chapter 13. For example, if you own a recreational boat free and clear, you may have to surrender that in a straight bankruptcy, but you may be able to keep it if you pay the trustee the value of the boat in your Chapter 13 plan.
Both Chapter 11 and Chapter 13 may offer more help with car loans and mortgages. In Chapter 7, if you are behind on these payments and can’t catch up, you may wind up losing that property. Under Chapter 13, you may be able to catch up on those past due amounts over time. In addition, in some situations, homeowners are able to wipe out a second mortgage on an underwater home or negotiate a modification of their primary mortgage by filing for this type of bankruptcy. Chapter 11 may be especially helpful to small business owners or real estate investors with multiple properties by allowing them to restructure their debts or catch up on payments that are behind.
As for the damage to your credit, while all types can legally remain on your credit reports for 10 years from the date you file, the major credit reporting agencies voluntarily remove completed Chapter 13 cases seven years from the date of filing.
Chapter 7 is generally cheaper than Chapters 13 or 11. With the former, you must pay your attorney upfront. With the latter, you may be able to pay part of your fee over time as part of your plan. Chapter 11 is generally the most expensive due to the higher filing fees and cost of the legal work involved.
Four More Ways Bankruptcy Can Help You
All types of bankruptcy can help you in certain ways to:
Eliminate certain debts. Bankruptcy may allow you to wipe out unsecured debts, and some taxes. Student loans typically cannot be discharged, except in cases of extreme hardship. Secured debts, like car loans or mortgages (not including certain underwater mortgages) are not eliminated, however, past due payments may be restructured to let the borrower catch up.
Stop aggressive debt collectors. When you file, you become protected by the “automatic stay,” which stops most collection actions against you. This can give you some breathing room while you get back on your feet.
Avoid taxes on cancelled debt. If you don’t pay back some of your debt, the creditor may be required to send you a 1099-C reporting this “cancelled” debt as income. This can result in a tax headache for you in future years. But debts discharged in bankruptcy are not considered taxable income, so it’s one less thing you have to worry about.
Allow you to keep protected property. Most of the time, savings in your qualified retirement plans are safe from creditors. In addition, in every state there is a list of “exemptions” — property you get to keep. There are also federal exemptions you may be able to choose if they are more favorable to your case.
Is Bankruptcy Right For You?
The best way to find out if bankruptcy can help you out of a downward financial spiral is to talk with a consumer bankruptcy attorney. Consumer bankruptcy law has become more complex in recent years so it’s a good idea to talk with someone who regularly represents consumers who need to file — not someone who makes this a small part of their practice! You can find a consumer bankruptcy attorney at NACBA.org.