If you are thinking about filing bankruptcy, there will be a lot of numbers involved as well as a lot of information you will want to be aware of prior to filing. Some of this information includes your income, debts, the value of your possessions and much more.
Beyond that, there are three other very important numbers: 7, 11 and 13. They refer to the chapters of the bankruptcy code under which your case may be filed.
It is important you understand the difference between these three types of bankruptcies. To help you do so, here are some of the basics.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often referred to as “straight” bankruptcy. Under this type of bankruptcy, most debtors can eliminate their unsecured debts quickly by surrendering their assets. Unsecured debts are debts like personal loans or credit cards that have no collateral for the loan.
Under Chapter 7 bankruptcy, the code provides for the liquidation, otherwise known as the sale, of the debtor’s assets such as nonexempt property with the proceeds of the liquidation going to the creditors that are owed.
Under this code, there is no repayment plan that needs to be drawn up because the liquidation is going to cover the amount of the debt. Exempt property is excluded from these assets, but all other remaining assets are up for inclusion in the liquidation process.
Qualifying for Chapter 7 Bankruptcy means you are an individual, partnership, or corporation that has the assets in which to liquidate to cover the debt. However, if you recently failed to appear in court or the bankruptcy petition was dismissed, you will be exluded from qualification for Chapter 7 bankruptcy.
The official bankruptcy forms should include a list of all the creditors and the amount that is owed to each, the source, amount, and frequency of income the debtor currently receives, a list of all available property that the debtor owns, and a list of the debtor’s monthly living expenses, in detail.
When the petition is filed for Chapter 7 bankruptcy, typically all collection actions that are against the debtor will come to a stop which means the creditor should no longer be able to garnish wages, initiate a lawsuit, or call and demand payment from the debtor.
A meeting of all the creditors will happen within forty days following the petition and the debtor will then go under oath and agree to answer any and all questions. For Chapter 7 to be successful, the debtor should comply and cooperate with the proceedings and provide any information that is needed.
Finally, at the end of the bankruptcy proceedings, the debtor will receive a discharge release that takes away any personal liability for the debts.
Chapter 11 Bankruptcy
Chapter 11 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. Chapter 11 bankruptcy may be useful for someone who does not qualify for Chapter 13, though it is more complex.
Through a more reorganized approach, Chapter 11 bankruptcy allows for a plan to help keep the business active while being able to pay all their creditors over a period of time.
The company will begin by filing a petition with bankruptcy court. The petition may be either voluntary or involuntary. A voluntary petition is filed by the debtor, while an involuntary petition is one that is filed by the creditors after certain requirements have been met.
The debtor typically has a time frame of approximately four months to come up with their reorganization plan. However, if there is instance of just cause, the court can then extend this amount of time and may allow the debtor to have up to eighteen months following the date of the filed petition.
When the debtor begins to arrange the reorganization plan, the idea is to place a priority on certain creditors for repayment and each creditor is placed into its own class. If there are any unsecured claims, then they are placed in a class of their own and are not lumped in with the others.
While a small business may be able to file Chapter 11 bankruptcy, they are often reverted back to Chapter 7 because the court may decide that the small business may not be able to provide any real profit following the bankruptcy. Larger corporations, however, have more of a chance at survival following bankruptcy.
Chapter 13 Bankruptcy
Now that you know a little more about all three, how do you decide which is your best option? Chapter 7 bankruptcy tends to be the fastest option and in many cases, this type of bankruptcy case can be completed in just a few months. Chapter 13 cases, on the other hand, cannot exceed five years but usually last about 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. For example, if you own a recreational boat without debt, you may have to surrender that in a straight bankruptcy under the codes of Chapter 7 bankruptcy. However, you may be able to keep it if you pay the trustee the value of the boat in your Chapter 13 bankruptcy plan.
Both Chapter 11 and Chapter 13 may offer more help with car loans and mortgages and other types of unsecured debt. On the other hand, under a Chapter 7 bankruptcy, 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 a specified amount of time. In some situations, homeowners can 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.
Chapter 7 is generally a more affordable option when compared to 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 repayment plan. Chapter 11 bankruptcy is generally the most expensive option due to the higher filing fees and the overall cost of the legal work involved.
Chapter 7 vs. Chapter 11 vs. Chapter 13
The goal of Chapter 13 bankruptcy is also to eliminate debts. However, it creates a plan to repay some or all debt over three to five years. Chapter 13 bankruptcy is often used in situations where someone wants to save their home from foreclosure, or where they can afford to pay some, but not all, of their debt.
Chapter 13 bankruptcy is the second most common and requires that the debtor makes monthly payments to a Trustee for the period of three to five years, and then the Trustee will distribute the money to the creditors that are owed.
Following Chapter 13 bankruptcy, the debtor will receive a discharge of debt. The debtor may even be able to set up new terms for repayment of a car loan and will protect the debtor’s co-signer on any loans they have from having to pay the debt.
Chapter 13 bankruptcy is also a way in which the debtor can protect his property while allowing him the time to pay off his debts as well as attorney’s fees within the monthly payment plan.
If you are faced with unsecured debts such as medical bills and credit cards and you need help getting a more manageable and affordable payment, or you need a way to help you get past late payments on your car, home, or other payments, then Chapter 13 bankruptcy may be the best move for you.
You should note that even if you are covered by an automatic stay during a Chapter 13 bankruptcy, you still need to make sure that you are making the payments on your mortgage during the process. If you fail to make your mortgage payments, then the court can consent to begin the foreclosure proceedings on the home.
If you stay current with the mortgage payments while filing for bankruptcy, then the automatic stay will work to stop the foreclosure proceedings. Chapter 13 bankruptcy will also allow you to pay any late charges on the home over the length of time as specified in the repayment plan.
4 Ways Bankruptcy Can Help You
While filing for bankruptcy may not be ideal, there are ways doing so can help you.
- 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 breathing room while you get back on your feet.
- Avoid taxes on canceled 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 in certain states.
How Bankruptcy Affects Your Credit
Your credit reports are a snapshot of many aspects of your financial habits, which also includes bankruptcy. Having a bankruptcy on your credit profile will do some damage to your credit scores.
While all three types of bankruptcies can legally remain on your credit reports for 10 years from the date you file, the major credit reporting agencies usually remove completed Chapter 13 bankruptcy cases seven years from the date of filing.
If you do file for bankruptcy, you can find out how it is appearing on your credit reports by getting copies of your free credit reports from the three major credit bureaus — TransUnion, Equifax and Experian — when you visit AnnualCreditReport.com. And, as you build your profile back up, you can monitor the changes by viewing two of your free credit scores on Credit.com.
Is Bankruptcy Right For You?
A good 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 familiar with the ins and outs.
The National Association of Consumer Bankruptcy Attorneys has a tool on its website — NACBA.org — that you can use to help find a consumer bankruptcy attorney in your area.
It is always in your best interest to consult with someone who is educated and very knowledgeable about bankruptcy and they will be able to guide you through the process and ensure that everything is being done as it should be done.
Deciding whether or not bankruptcy is the right move for you really comes down to the nature of the debt you are faced with as well as how vulnerable you may be to the creditors involved.
It is also important to note that there is a chance not all of your debt will be discharged during a bankruptcy. Debts such as past due child support, past due income taxes, and student loans are all types of debt that may not be eligible for discharge or a debt repayment plan following bankruptcy proceedings.
In the case of child support, for example, Chapter 7 bankruptcy will not be able to eliminate or reduce the amount you owe in child support. However, the amount may be reduced in a Chapter 13 bankruptcy after you make a repayment plan that has the debt paid in the three to five-year timeframe.
When deciding how to proceed, gather information regarding all the debt you owe and speak to a qualified individual to help you determine which Chapter of bankruptcy, if any, would be right in your particular situation
This article has been updated. It was originally published December 15, 2016.