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Filing Bankruptcy: What You Need to Know About Chapter 7 vs. Chapter 11 vs. Chapter 13

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Chapter 7 vs Chapter 11 Bankruptcy: What You Should Know

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

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 7 vs. Chapter 11 vs. Chapter 13

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.

4 Ways Bankruptcy Can Help You

While filing for bankruptcy may not be ideal, there are ways doing so can help you.

  1. 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.
  2. 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.
  3. 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.
  4. 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.


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  • annon123456

    So please give us explicit detail on how we can discharge student loans in bankruptcy. I have no debt other student loans (around $97,000 down from 136,000) and medical debt on a payment plan (if I don’t pay they won’t see me). I have cancer, lost my job over it, have been mostly unemployed since Jan 2013, have retirement savings and that is about it. Car is a 1990, also have a small class B RV I am trying to sell which is a 1988, living in someone else’s basement because otherwise I’d be living in my car and 17′ RV, the rest of my stuff is in storage… Going on one of the income based programs makes no sense because (a) if I ever get a decent job again the payments will go way up (nearly double what I am now paying – well would be paying were they not in deferment) and (b) I need to use that money to shore up retirement so I am not living in poverty if I were to live long enough to retire (this cancer has no cure but a longer life span)… not to mention the huge tax bite when the unpaid portion of the the loan is finally excused after however many gabillion years. So other than trying to get accepted to that space program for a one way trip to mars, what exactly can I do to get my student loans off my back? As far as I see it is hope I finally get a good job again and can resume payments or bankruptcy but even finding an attorney who knows you can include it in the filing is hard. What exactly are the rules and what exactly do you have to do in order have it included and hopefully get a judge to agree (presuming a judge even knows you can do this and I’d bet some don’t).

  • dawn

    I heard if you used your loans to live on while in school then you could file bankruptcy on them cause then there a unsured debt

    • annon123456

      Not true. With school loans you have to show an extreme form of hardship that you are unlikely to recover from due to projected income, etc. Rules that apply to other unsecured debt do not apply here thank you our federal government who made student loans a special case of loans.

      • justsayin

        A government that promotes higher education and then makes it unattainable for so many!


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