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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

Ideally, you’d be able to pay off your loans and other debt you have. But sometimes situations present themselves that makes it impossible. If you find yourself in such a spot, you may be considering declaring bankruptcy. This is a major decision that should not be taken lightly — it’s important to understand what filing for bankruptcy entails, the effect it will have on your life and how to decide if it’s right for you.  

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. And beyond that, there are three other very important numbers: 7, 11 and 13. They refer to the chapters of the bankruptcy code that your case may be filed under. It’s important you understand the difference between these three types of bankruptcy. To help you do so, here are some basics.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy 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 five 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

Now that you know a little more about all three, how do you decide which is what might be your best option? Well, 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 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. (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.

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.

4 Ways Bankruptcy Can Help You

While filing for bankruptcy may not be the 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 some breathing room while you get back on your feet.
  3. 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.
  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 if they are more favorable to your case.

How Bankruptcy Affects Your Credit

Your credit reports are a snapshot of many aspects of your financial habits, which includes if file for bankruptcy. Having bankruptcy on your credit profile is going to damage 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 cases seven years from the date of filing.

If you do file, you can find out how it’s 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 And, as you build your profile back up, you can monitor the changes by viewing two of your free credit scores, updated every 14 days, on

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 who is familiar with the ins and outs of bankruptcy. The National Association of Consumer Bankruptcy Attorneys has a tool on their website — — that you can use to help find a consumer bankruptcy attorney in your area.

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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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