If you are thinking about filing bankruptcy, there will be a lot of numbers involved: Your income, debts, the value of your possessions 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 under which your case may be filed. 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 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.
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 though it is more complex.
Chapter 13 Bankruptcy
The goal of Chapter 13 is also to eliminate debts. However, it creates a plan to repay some or all debt over three to 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, but not all, of their debt.
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 is the fastest. In many cases, this type of bankruptcy case can be completed in 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, 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 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 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.
- 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 includes bankruptcy. Having bankruptcy on your credit profile will 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 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.
This article has been updated. It was originally published December 15, 2016.