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For a person or a company that is overwhelmed with debt, bankruptcy can represent a lifeline, allowing them to reconcile with their creditors and start afresh. For creditors, bankruptcy offers a way to collect debts that they could otherwise cancel.

The United States Bankruptcy Code provides for six types of bankruptcy: Chapters 7, 9, 11, 12, 13, and 15. Selecting the appropriate bankruptcy chapter is crucial to a successful filing. Below we discuss the basics of bankruptcy and the main types.

Bankruptcy basics

Generally speaking, the most common types of bankruptcy are Chapter 7 and 13. Both are available to a wide range of people, although you must meet certain requirements to file for Chatper 7. Chapter 11 bankruptcy is also quite common – businesses and individuals can seek this type of bankruptcy. Fewer debtors are filing under Chapters 9, 12 or 15 since these are for municipalities, family farms or fishing operations, and bankruptcies involving entities in multiple countries, respectively.

Debtors seeking protection under bankruptcy laws ultimately want their debts discharged. A discharge is a court order stating that the debtor does not have to pay the debt. Only certain debts are eligible for discharge – for example, liens on property such as houses or automobiles are not discharged by bankruptcy. You also cannot discharge debts that you have accumulated after filing for bankruptcy.

The process

To file for bankruptcy protection, debtors first submit a petition to their local federal bankruptcy court (all bankruptcy cases are handled in federal court). Filing requires the debtor to submit a number of forms and lots of information about their financial situation, including tax returns, income documents, mortgage statements, and bank account statements. Filers must also complete a pre-bankruptcy credit counseling course and a pre-discharge debtor education course from approved providers.

After filing, the debtor meets with creditors and a court-appointed trustee to answer questions under oath about the debtor’s ability to repay the debts. This is called a 341 meeting since it is mandated by Section 341 of the Bankruptcy Code. Finally, after a period ranging from a few months to several years (depending on the type of bankruptcy and agreement you choose), the discharge is issued.

Some benefits come earlier. Filing for bankruptcy immediately prevents creditors from further phone calls, letters and other attempts to collect most debts. But the impact of bankruptcy can linger much longer. Bankruptcy can stay on a credit report for up to a decade, making it harder and more expensive to get credit.

This is a basic description of bankruptcy and much of the process depends on the chapter. That’s why it’s important to know your options and goals and choose the right chapter. With that in mind, below are details on the three main types of bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 is also called liquidation bankruptcy because it provides for the sale of most of the debtor’s assets to pay creditors. Almost all Chapter 7 filers get at least some of their debt. It can be used by individuals or businesses.

Advantages and disadvantages

Chapter 7 offers the fastest path to bankruptcy. A Chapter 7 filing can take as little as four months from filing to final resolution. This is largely because there is no repayment plan, as is the case with Chapter 13 bankruptcy, which can involve three to five years of regular payments before debts are paid off. .

In chapter 7, filers can keep certain personal assets exempt from liquidation. Exemptions vary by state and are intended to allow debtors to continue working and living. Exceptions may include automobiles, clothing, furniture, pensions, and certain equity. In practice, most Chapter 7 filings are so-called no-asset cases where all of the debtor’s assets are exempt.

A reaffirmation is a useful Chapter 7 tool that gives the debtor some flexibility. If a debtor wishes to retain a specific secured debt, they may reaffirm the debt or enter into an agreement with the creditor to pay all or part of the amount owed. This tool can allow the debtor to keep, for example, a house or a car which otherwise may have to be sold.

The main disadvantage of Chapter 7 is that you will have to sell certain assets that bankruptcy will not allow you to keep (non-exempt assets). Another limitation of Chapter 7 is that co-signers can still find themselves liable for their share of the debt – creditors are still free to sue your co-signer, even if they can no longer sue you. Also, you can only file Chapter 7 once every eight years.

Not everyone can file Chapter 7. There is a means test that limits who can file. To file under Chapter 7, a debtor’s current monthly income must be less than $12,850 or 25% of unsecured debt. Unsecured debt is any debt not secured by collateral – personal loans and student loans fall into this category. If a Chapter 7 filer has too much income under this means test, the court can dismiss the petition or move it to a Chapter 13 filing.

Is it good for you ?

If Chapter 7 doesn’t seem like the right decision, it’s always possible to negotiate out-of-court settlements with creditors. Credit counselors can help design and negotiate debt repayment plans without resorting to bankruptcy.

Chapter 13 Bankruptcy

A filing under Chapter 13 is also called an employee’s plan. It allows a debtor to keep more assets at the cost of repaying their debts over a longer period, usually three to five years.

Advantages and disadvantages

Chapter 13 allows filers to protect their homes from foreclosure. This type of bankruptcy stops foreclosure and allows the debtor to catch up on mortgage payments. Other debts can be restructured to give the borrower more time to pay them off.

Chapter 13 can protect co-signers with a special provision. And, like in Chapter 7, creditors must stop trying to collect debts when the petition is filed. The Chapter 13 debtor makes payments to a trustee, who distributes funds to creditors, so debtors do not have to have contact with creditors when making payments.

The downside of Chapter 13 is that debts still need to be repaid. It also takes longer than Chapter 7. It usually takes at least three to five years before the payment plan ends and the court pays off the debts.

Is it good for you ?

Chapter 13 requires the debtor to submit a repayment plan after meeting with creditors. Then the plan must be approved by the court at a hearing. The plan provides regular payments, usually monthly. And the debtor must start making payments within 30 days, even if the plan has not yet been approved. If you need your debts paid off sooner, consider Chapter 7.

Chapter 11 Bankruptcy

Chapter 11, also known as bankruptcy reorganization, is commonly associated with corporations and partnerships. However, individuals in business, such as sole proprietors, can also use a Chapter 11 filing. Like Chapter 13, Chapter 11 involves a repayment plan.

Advantages and disadvantages

Chapter 11 is intended to allow a business to remain in business while debts are restructured, paying creditors over time. This is a major advantage for the declarant and, often, for creditors who otherwise would have no prospect of repayment.

Chapter 11 filings are typically the most complex, expensive and time-consuming. When a large corporation files for bankruptcy protection, it’s usually under Chapter 11. Court costs are much higher, attorney fees can be even higher, and Chapter 11 cases take years to complete. to conclude.

Chapter 11 cases rarely have a trustee. Instead, the declarant acts as a trustee in a role called the debtor in possession. The debtor in possession continues to operate the business and works with creditors to create a repayment plan. A majority of creditors must vote in favor of the plan for it to be approved.

Is it good for you ?

If you are a corporation or a partnership, Chapter 11 may be the solution for you. Small businesses can also file under Chapter 11 under two different special categories.

How to select a type of bankruptcy

The choice of a chapter under which to file rests, within certain limits, with the debtor. It depends on your needs.

Generally, Chapter 7 is best for those with limited income and few assets who want to close the deal as quickly as possible. But those who want to file under Chapter 7 must pass a means test. In short, if you have too much income, the court can deny a Chapter 7 liquidation petition or turn it into a Chapter 13 bankruptcy.

Chapter 13 may be better suited to someone who wants to hold on to as many assets as possible and has the income to support repayment.

Meanwhile, companies aiming to stay in business can choose Chapter 11.

Many filers, especially in complex cases, are represented by bankruptcy attorneys who guide the decision on how to file. Professional organizations, such as the National Bar Association or your local bar association, can be sources of referrals to competent attorneys, as can personal recommendations from friends and family members. If finances are tight, you can often find an affordable attorney by contacting your local legal aid society.

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The decision to seek bankruptcy protection can have ramifications that resonate for years, involving a great deal of cost and time investment. To get the maximum benefit for the minimum pain, take the time to study the different chapters and select the one that fits your individual situation. Before declaring bankruptcy, consider all of your debt relief options.

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