Bankruptcy is a legal process of debt relief that allows individuals or business entities cancel or reorganize their financial obligations. Many see bankruptcy as a non-acceptable or even dreadful solution due to social and financial complications it leads to. However, for the majority of desperate debtors, bankruptcy may become the only reasonable way of getting rid of unbearable and hopeless debt burden which ruin their lives day by day.
Bankruptcy has several types (called chapters) and each chapter is purposed to solve a definite problem. Your task is to define what chapter is the best for you, according to the amount of debts you have, your median income and other criteria.
Now let’s take a closer look at all chapters and what types of debts they cover.
Chapter 7 bankruptcy
Chapter 7 is the most “attractive” one for debtors as this chapter presents many advantages comparing to other bankruptcy types. It’s the easiest, the fastest and the cheapest Chapter to file for.
This Chapter is the best for individuals with low-to-average median income and the decent debt limit (though debt limit is not a key factor for Chapter 7). Your median income for last 6 months should not exceed a certain amount (visit the U.S. court website for details).
Chapter 7 writes off your debts, excluding taxes, child support, student’s loan, and some other types of loans (see the full list here).
According to Chapter 7, a special bankruptcy Trustee (given by the court) takes off your nonexempt assets and manages the selling process of your home, car, etc.
You are allowed to keep you exempt assets like your furniture, clothing, and a car (which value does not exceed 2-3K dollars). The Chapter is available only for individuals, not for businesses.
Chapter 9 bankruptcy
Chapter 9 bankruptcy is designed especially for municipalities that face financial hardship and unbearable debts.
These could be towns, counties, schools, villages, etc. This chapter is not available for individuals or business entities. That is why it is the least known and used chapter, though sometimes it is only the way to keep the municipality “alive” by giving it a chance to readjust its financial obligations.
In order to do that, the municipality must be accredited by the state law. There are other few criteria for filing for Chapter 9: the municipality must be totally insolvent. That means filing for bankruptcy has to be the only solution, not the easiest one. If there is another way to satisfy creditors’ claims – the municipality must use it.
And the last but not the least: to receive the bankrupt status, all creditors must agree with the idea of debts’ adjustment.
Chapter 13 bankruptcy
It is, in fact, a debt reorganization plan, designed to make it easier to repay the loans. Those, who are in financial hardship while having several unpaid loans, may file for Chapter 13 bankruptcy.
This chapter is available for those who did not qualify for Chapter 7 due to several reasons: the debt amount is too large and the median income of the debtor is higher that it is required for Chapter 7.
Chapter 13 means the debtor will repay the debts in three-five years in accordance with the reorganization plan approved by the U.S. court.
The advantage of Chapter 13 is huge: the debtor does not go bankrupt, so he/she is allowed to keep all their assets and possessions, including house and cars. The chapter is only available for individuals, not for business entities.
Chapter 11 bankruptcy
Basically, Chapter 11 is the same as Chapter 13, but Chapter 11 is usually used by business entities, corporations, and partnerships. Chapter 11 bankruptcy means a business doesn’t go bankrupt, so it doesn’t need to shut down all operational processes and lose clients. The company reorganizes its debtors’ obligations according to the well-developed and approved by the U.S. plan.
The plan must also be approved by all creditors (at the special meeting prior to the court hearing).
However, if the bankruptcy process is caused by the Company’s law issues (related to taxes, fraud, etc.), the Company is not allowed to keep its business processes active and a Trustee (given by the court) withdraw a company’s assets in order to sell it in creditors’ favor.
Chapter 12 bankruptcy
Chapter 12 bankruptcy is only used by owners of family farm businesses or fisheries. Moreover, the financial hardship must arise exactly from those farms operations. If that will be proved, Chapter 12 will allow applicants get rid of their debts or reorganize them in accordance with the court’s advice.
This is rarely used chapter with the pretty high fee for filing for it.
What bankruptcy Chapter is the best for your situation?
Most individual debtors aim for Chapter 7 as this chapter allows almost all debts canceling and the whole process is relatively fast and easy. Besides, filing for Chapter 7 is cheaper then, filing for Chapter 13 or 11. However, not everyone qualifies for Chapter 7. If your average income allows repaying debts in the longer run (with the delay) you are recommended to consider Chapter 13 which will not bring you a title “bankrupt”.
With the Chapter 13, you will still be on track, while the debt burden will be much easier to cope with.
In a case you are not sure what bankruptcy chapter you should better file for – consider hiring a bankruptcy attorney. Remember, if your bankruptcy request will not be approved you will not receive a fee you’ve paid to the court back. Thus, it’s vital to make everything that increases your chances for success. Professional attorney helps you to fill in the papers with the accuracy needed to have your application approved.
Also, keep in mind that your loans’ cosigners will not be freed from financial obligations on your loans. Bankruptcy means that only you personally receive the debt relief.
What should I be prepared for before starting the process of bankruptcy?
First of all, the process takes time. The fastest process (Chapter 7) takes up to 6 months, so during all this time your assets will be withdrawn and sold in order to satisfy creditors’ claims.
You should also be prepared for having your name in official public bankruptcy record, so anyone can find out about your bankruptcy. It may lead to some complications, but still, it is better than getting into jail for not paying your debts.
You should also be prepared to have your credit score lowered to the critical point, so you may not qualify for the majority of bank loans.
Some people and business entities may refuse to deal with bankrupt individuals but you should remember: all this is temporary and worth of your efforts. See bankruptcy as a chance to start a new life, not an “end of life”.