Summary of article by Credit.com
Bankruptcy is a court proceeding in which your assets and liabilities are examined to determine whether your debts should be discharged or restructured. Filing bankruptcy is a serious step used as a last resort. However, you should consider filing Chapter 7, Chapter 11 or Chapter 13 bankruptcy in some situations. When comparing your options, it’s important to understand the differences between the three most common forms of bankruptcy.
- Chapter 7 bankruptcy doesn’t require a repayment plan but does require you to liquidate or sell nonexempt assets to payback creditors.
- Chapter 11 bankruptcy is a reorganization plan most often used by large businesses to help them stay active while repaying creditors.
- Chapter 13 bankruptcy eliminates debts through a repayment plan that lets you pay back a portion of your debt over a three- or five-year period.
- Chapter 7, Chapter 11 and Chapter 13 bankruptcies all impact your credit, and not all your debts may be wiped out.
How Chapter 7 Bankruptcy Works
Chapter 7 is the most common type of bankruptcy and often referred to as a straight bankruptcy. Under Chapter 7, you can quickly eliminate most of your unsecured debts by surrendering your assets. Unsecured debts are debts not secured with collateral, including most personal loans and credit cards.
Individuals qualify for Chapter 7, but partnerships or corporations with assets that can be liquidated to cover debts also qualify. Liquidation involves the sale of your assets to pay what’s owed to your creditors. Some assets are exempt from sale, but all nonexempt assets may be included in the liquidation process.
When you file a petition for Chapter 7 bankruptcy, typically all collection actions against you come to a stop. This means creditors should no longer be able to garnish your wages, call and demand payment or initiate a lawsuit against you. About 40 days after filing your petition, a meeting with your creditors occurs, and you must agree to answer all questions under oath. If your Chapter 7 bankruptcy is successful, you receive a discharge that releases you from personal liability for your debts.
What Does It Mean to File Chapter 11 Bankruptcy?
Filing Chapter 11 bankruptcy basically means you’re submitting a reorganization plan to restructure your debts to help you repay your creditors over time. It’s most often used by large businesses, but it can also help certain people and small-business owners. Chapter 11 is a more complicated bankruptcy filing, but can be useful if you don’t qualify for Chapter 13.
If you’re filing Chapter 11 bankruptcy as a business, it helps you create a plan to keep your business active while paying all your creditors over a set period. When a business files a petition for Chapter 11 with the court, it may be voluntary or involuntary. A voluntary petition is filed by the business, but an involuntary petition is filed by the business’ creditors once certain requirements have been met.
You have approximately four months to come up with a reorganization plan after filing your petition, but in some cases this time frame may be extended up to 18 months. When creating your reorganization plan, you place each of your creditors into its own class. Unsecured debts are placed in a separate class and never lumped with any other debts. Priority for repayment is placed on certain debts, which means these are paid before others.
How Chapter 13 Bankruptcy Works
Chapter 13 is the second most common type of bankruptcy and used primarily by individuals. The goal of Chapter 13 is to eliminate your debt by creating a repayment plan to pay back all or a portion of what you owe your creditors over three or five years. You make monthly payments to a court trustee, and the trustee distributes the money to your creditors. At the end of your plan, the remaining unpaid debts are discharged.
Filing Chapter 13 creates an automatic stay that stops most collection actions, which generally means creditors can’t seek wage garnishments, make calls demanding payment or file lawsuits. Automatic stays also protect your co-debtors and can save your home from foreclosure. However, you must continue to pay your mortgage, or the lender can get the court to start foreclosure proceedings.
Chapter 13 bankruptcy works especially well if you can afford to pay some, but not all, of your debt. If you’re faced with unsecured debts, including credit cards and medical bills, Chapter 13 helps you achieve a more manageable and affordable payment. It helps you get past late payments on your home, car or other debts. It protects your property while giving you time to pay off your debts and attorney fees within a monthly payment plan.
Is It Better to File Chapter 7 or 13?
Chapter 7 is generally a more affordable option when compared to Chapters 13 and provides a relatively quick way to get out from under your debts. Filing Chapter 7 might be a good option if you:
- Own little or no property
- Have an income level that passes the means test
- Have mostly unsecured debt, such as medical bills, credit card debts and personal loans
- Don’t want to be stuck with a repayment plan for the next three or five years
When you have debts that won’t be discharged, such as unpaid income taxes, domestic support obligations or student loans, Chapter 13 may be the better option. Chapter 13 bankruptcy is also typically used when you want to save your home from foreclosure. If you have a high income that disqualifies you for Chapter 7 and you can afford to pay some of your debt, Chapter 13 may be your only option.
What’s the Difference Between Chapter 7 and Chapter 11 Bankruptcy?
The biggest difference between Chapter 11 and Chapter 7 is Chapter 11 is a reorganization bankruptcy and Chapter 7 is a liquidation bankruptcy. This means that, in Chapter 7, you’re required to sell your assets to pay as many creditors as possible.
Chapter 11 lets you negotiate with your creditors to modify the terms of your debts and create a repayment plan without having to sell your assets. While individuals and businesses can utilize either type of bankruptcy, Chapter 7 is typically favored by individuals. Chapter 11 is geared more towards business owners.
What Is the Difference Between Chapter 11 and Chapter 13 Bankruptcy?
Notable differences between Chapter 11 and Chapter 13 are eligibility requirements. Chapter 11 is open to almost any individual or business without any specific income or debt-level limits. Chapter 13 requires you to have a stable income, has specific debt limits and is reserved for individuals or, in limited cases, sole proprietorships. Chapter 13 also includes the appointment of a trustee who collects and distributes payments to your creditors, which is seldom done in Chapter 11.
Despite the differences, there are also several similarities. Both Chapter 11 and Chapter 13 let you keep certain assets you might lose under Chapter 7 bankruptcy. Both may offer more help with car loans, mortgages and other types of unsecured debt. Under Chapter 7, if you’re behind on these payments and can’t catch up, you may lose the property.
How Bankruptcy Affects Your Credit
Whether you file Chapter 7, Chapter 11 or Chapter 13, your credit score will suffer. Legally, credit report agencies can leave all three types of bankruptcies on your credit reports for 10 years from your filing date. However, they usually remove completed Chapter 13 bankruptcy cases in seven years.
If you file for bankruptcy, find out how it’s affecting your credit by getting copies of your free credit reports from the three major credit bureaus when you visit AnnualCreditReport.com. Your credit reports are a snapshot of your financial habits, so there are many ways to rebuild your credit after bankruptcy. As you rebuild your credit profile, monitor the changes by viewing two of your free credit scores on Credit.com and sign up for your free credit report card to build or rebuild your credit.
Is Bankruptcy Right for You?
Deciding whether bankruptcy is right for you really comes down to the nature of your debt and how vulnerable you may be to your creditors. Remember, not all your debts may be discharged during bankruptcy. Student loans typically can’t be discharged, except in cases of extreme hardship. Past due income taxes and child support may also not be eligible for discharge or a debt repayment plan. Also keep in mind that you will have to pay a filing fee–the price depends on which chapter you file for and what state you live in.