When financial issues arise, and you’re unable to pay off your debts, bankruptcy allows the opportunity for a fresh start. Filing bankruptcy can be a stressful experience that no one wants to go through, but sometimes it is the best and only option! There are several types of bankruptcy (with Chapter 7, Chapter 11, and Chapter 13 being the most common) fit for different scenarios. Working with a seasoned bankruptcy lawyer is the best way to determine which type will be ideal for you depending on your unique situation!
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, also known as liquidation or “straight” bankruptcy, provides debt relief for certain individuals who are under a certain income limit regardless of how much debt they have accrued. Many debts will be eliminated entirely. Some debts will require certain possessions (but not all of your possessions) to be liquidated, or sold, in order to pay off and clear remaining debt.
Specific Information About Chapter 7 Bankruptcy
Pros
- Chapter 7 bankruptcy can eliminate almost all unsecured debts. Unsecured debts are debts that aren’t backed by assets being promised to a creditor. Examples of unsecured debts when it comes to Chapter 7 bankruptcy are things like credit cards, personal loans, medical bills, and more. Taxes and student loans are not classified as unsecured.
- Harassment from creditors stops immediately from the first day you file for Chapter 7 bankruptcy. Filing for bankruptcy isn’t an easy step to take, but once you do, it forces creditors to drop the lawsuits and excessive phone calls so you can have some peace of mind as you work through the process. It also puts a halt on repossession of your vehicle or on foreclosure.
- You get a fresh start and can begin to rebuild your credit. While bankruptcy is a mark that goes on your credit, your debt-to-income ratio will decrease as soon as you file, giving you the chance to start improving your score. Most people can establish good credit within 2-3 years from the day they filed for bankruptcy.
- You don’t have to repay your creditors.
Cons
- Not everyone can qualify for Chapter 7 bankruptcy. It is income restricted, meaning if you make more than the median income (your average income over the last six months before filing) for a family of your size in your state, then you will have to pass a “means test” in order to be able to file. The means test checks whether you have enough disposable income to repay at least a portion of your unsecured debts over a 5 year repayment plan; if you do, you will not be able to qualify for Chapter 7 (though you may be able to qualify for another type of consumer bankruptcy).
- It is no secret that filing for any type of bankruptcy will affect your credit score. Chapter 7 bankruptcy can stay on your credit report for up to 10 years, and is likely to drop your credit score at least 150 points; however, as we mentioned, that score can be brought up quickly.
- You can lose large assets, like property (particularly if you have a second home or vacation home). When you file for Chapter 7, even though foreclosure is initially halted, you may end up losing your home when everything is said and done if you are behind on your mortgage payments, have significant equity in the home, or aren’t protected by one of California’s homestead exemptions.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, also known as a wage earner’s plan, is another form of consumer bankruptcy that helps people with regular, reliable income develop a strategy to pay off their debt. Some debts will be discharged, while individuals will get 3-5 years to resolve their remaining debts via payment plan that is set up during the filing process.
Specific Information About Chapter 13 Bankruptcy
Pros
- A common misconception regarding bankruptcy is that it means you automatically lose your house, but this is not the case, especially with Chapter 13. In fact, you should be able to save your home from foreclosure after filing, should you continue to make mortgage payments on time. You also are not likely to lose any of your other possessions.
- Chapter 13 only remains on your credit score for 7 years, while Chapter 7 remains for 10 years. This may result in less of a negative impact; depending on your credit score to begin with, it should only drop about 100 points compared to 150.
- If you meet the requirements of the payment plan, you will process said payments to a Chapter 13 trustee, who distributes them to creditors. That means you don’t have to work directly with creditors (which can be complicated and intimidating).
Cons
- Debt has to be paid from disposable income in a Chapter 13. Disposable income is after-tax income that has already been used for your necessities. Any extra money that one would typically spend on “fun” purchases is used for the repayment plan; this may mean you are stretched thin for a few years until the bankruptcy process is complete.
- It is hard to get a mortgage loan once you’ve gone bankrupt, as lenders are hesitant to give you money you haven’t necessarily proven you can repay.
- Like Chapter 7, the process of filing for Chapter 13 bankruptcy is public. While you aren’t required to share this information with friends and family, it is sometimes inevitable that they catch wind of it. This can lead to feelings of shame and regret, although those feelings are really unfounded; getting into debt doesn’t mean you’re irresponsible or you have failed, and filing is usually a great step towards healing financially.
- You have to repay creditors, as opposed to Chapter 7.
What Is Chapter 11 Bankruptcy?
Sometimes known as “reorganization bankruptcy” (although that term can be used for a Chapter 13 as well), this type of bankruptcy is most commonly used by companies and partnerships in order to pay off debts without having to stop operating. Businesses create a payment plan that is typically longer than 5 years in order to pay creditors all of their unsecured debts. The main difference between Chapter 13 and Chapter 11 is that there is no limit to the debts that can be addressed in a Chapter 11 filing. However, because it is the most complex and expensive type, typically companies use this over individuals.
Specific Information About Chapter 11 Bankruptcy
Pros
- The biggest, most obvious benefit, that was mentioned above, is that when a business or partnership files for Chapter 11 bankruptcy, they can continue to operate their business and make profits, as opposed to having to shut down and sell assets if they were to file for Chapter 7. This sets businesses up for a much better financial future!
Cons
- The success rate of Chapter 11 bankruptcy is actually less than 10% because the rules & regulations are complex and often blurred. The process can also be very costly and last for years; it is the most expensive type of bankruptcy.
Which Chapter Of Bankruptcy Is Best?
Bankruptcy isn’t “one size fits all,” and what is best for you might not be best for someone else; the type you should choose is highly dependent on your current financial circumstances, your goals, and other factors. That is why it is important to work with a seasoned bankruptcy attorney who can help you determine which bankruptcy option you should be filing for to get the financial and emotional relief that you need! Equal Justice Law Group will help you file without mistakes and obtain a clean slate.
Why Choose Equal Justice Law Group?
Our firm’s lead California bankruptcy attorney, David Foyil, is equipped with the knowledge to help you determine whether Chapter 7 bankruptcy, Chapter 11 bankruptcy, or Chapter 13 bankruptcy is the right choice for you. We explain your legal options and the bankruptcy process in as simple terms as possible. To us, every client is a partner, and we will communicate with you every step of the way so you never feel alone and feel instead empowered to take back control of your financial future! Let us give you a fresh start. Call today for a free, no-obligation consultation.
