To decide whether bankruptcy is right for you, you first have to understand what specific options might be available to you. Each chapter of bankruptcy can have substantially different effects, and a chapter that works perfectly for one person might be an unwise decision for another.
At US Legal Group, APC, we have a thorough understanding of each chapter of bankruptcy, which we can use to help you determine which one is right for your situation. In the meantime, we have provided a brief overview of each of the three main chapters.
Before diving into the differences among each chapter, however, here are a few of the major commonalities:
- All chapters trigger the automatic stay, which halts the collection activities of your creditors. For the entirety of your case, therefore, you are free from calls, letters, foreclosure, repossession, lawsuits, and more.
- Bankruptcy generally results in a debt discharge, which eliminates your liability for qualifying debt. This discharge will occur at the end of your case. Once your debt is discharged, your creditors can no longer attempt to collect it.
- Bankruptcy generally cannot discharge secured debts (e.g. mortgages, car loans, etc.) or debts for child support, alimony, criminal penalties, and more. Tax debt and student loans are possible to discharge, but they are more difficult than other forms of unsecured debt.
- Most bankruptcies result in discharges of medical debt, credit card debt, payday loans, and/or utility bills.
Read on to learn about Chapter 7, Chapter 11, and Chapter 13, and whether any of these options may be right for you.
Chapter 7 Bankruptcy
Many people call Chapter 7 “liquidation bankruptcy,” which is what triggers the false stereotype that prevents many qualifying debtors from ever considering bankruptcy. No matter how dire their financial situation may be, they avoid bankruptcy because they are worried the court will seize and liquidate everything they own.
While liquidation is an essential part of Chapter 7, most people who file can protect most—if not all—of their possessions. This is because every state has bankruptcy exemptions, which allow you to exempt (i.e. shield) certain assets and equity from liquidation. Every state is unique, and some allow you to use federal exemptions instead.
When you file Chapter 7, the trustee will take your nonexempt assets (i.e. those you cannot protect through exemptions), liquidate (sell) them, and use the resulting funds to repay your debt in order of priority under the Bankruptcy Code. After this process, the court can discharge whatever unsecured debt remains. The entire case will likely take 3-6 months.
Unfortunately, not everyone can qualify for this straightforward, efficient form of debt elimination. You must demonstrate your need for Chapter 7 relief through the means test, which compares your income (and potentially your assets and expenses) to that of others in your state. You may consider another chapter if you cannot qualify for Chapter 7 or you wouldn’t be able to protect your assets from liquidation.
Individuals, couples, and business entities can file Chapter 7 bankruptcy. Businesses, however, generally do not survive the Chapter 7 process.
Chapter 11 Bankruptcy
Chapter 11 is generally the most complicated (and expensive) form of bankruptcy. Instead of taking a few months, it can take several years. Most Chapter 11 petitions are filed by business entities (specifically corporations), but some individuals who cannot qualify for any other chapter may file Chapter 11 as well.
While Chapter 7 involves liquidation, Chapter 11 is a form of debt reorganization. Either you or your creditors will propose a debt repayment plan, and you may qualify for a discharge at the end of this plan. The primary advantage of Chapter 11 is that it allows companies to reduce financial obligations without going out of business. They can continue running for the duration of the case, but they may need to downsize or otherwise adjust their operations.
If you are hoping to file as a small business, you may have a new option: Subchapter V of Chapter 11. Beginning in February of 2020, small businesses owing up to $2,725,625* can use Subchapter V to avoid many of Chapter 11’s most cumbersome obstacles.
*The CARES Act temporarily increased this threshold to $7,500,000 to allow more businesses to qualify for Subchapter V. This limit will return to the original amount in March of 2021.
Chapter 13 Bankruptcy
Often called the wage earner’s plan, Chapter 13 is another type of debt reorganization, but only individuals can qualify. The only way you can resolve business debts through Chapter 13 is if you are a sole proprietor.
Under Chapter 13, you will propose a 3-5-year repayment plan, and your income and expenses will dictate the size of your monthly payment. This is highly beneficial because debtors can make payments that suit their budget, and the court will discharge any remaining unsecured debt at the end of the plan. You must make all payments, however, or the court may convert your case into a Chapter 7 instead.
Because Chapter 13 does not involve liquidation, many people use it to protect assets they would have lost through Chapter 7. Once you file Chapter 13, the automatic stay halts and prevents collection activities like foreclosure and repossession. If you can catch up on any late payments by the end of your 3-5-year repayment plan, your lender will no longer be able to sell your vehicle or home.
Some courts will even cram-down a secured loan under Chapter 13. In other words, the court will reduce what you owe on a vehicle or home to the fair market value of the property. For example, if you owe $300,000 on a house because you took out a second mortgage, and the home is only worth $250,000, the court can convert the $50,000 difference into unsecured debt and discharge it at the end of your case.
Finding the Right Chapter for You
If you are struggling with debt, bankruptcy might be your path toward financial freedom. The most effective chapter for your situation will depend on the type of debt you owe, the value of your assets, whether or not you own a business, and much more.
For personalized assistance with your legal and financial matter, come to US Legal Group, APC. Our attorneys look forward to using our extensive knowledge to help you overcome your crisis.