Types of Bankruptcy

Types of Bankruptcy: Chapter 7, Chapter 11 & Chapter 13

There are many different types of bankruptcy available to people who find themselves in an overwhelming amount of debt and no other viable options. Car loans, mortgages, student loans, as well as other loans and expenses that you have, may make it difficult to afford necessities for a decent quality of life. Bankruptcy can be a frightening concept, but knowing what options are out there can help bring peace of mind and long-term financial success. Two of the most common types of bankruptcy are chapter 7 and chapter 13, and while both have their place, knowing what each one entails will help you make the best decision as every situation is different.

Chapter 7

Chapter 7 bankruptcy is one of the most common types of bankruptcy declared, and it comes with the benefit of having all of your debts discharged upon filing. This means that you will be given a fresh start, as none of the debts that you have will continue after filing. Creditors are also required to cease contacting you as soon as bankruptcy filings begin to be processed by the court. Prior to your petition being considered, the court will mandate that you go through credit counseling with an appointed financial advisor to ensure that no other options are available to you. Your assets and liabilities will be compiled by a trustee and assets you have will be sold off to pay down as much of the debt as possible, then the rest will be discharged.

The major drawback to chapter 7 is the initial damage that will be done to your credit score after filing. Depending on where your score is, you may see a drop of up to 200 points in your score, and chapter 7 stays on a credit report for 10 years after filing has taken place. Chances are if you are in a position considering bankruptcy, your credit score could be damaged just as badly by missed payments if it has not already been. There are steps that you can take to help repair your credit score as well, such as attaining secured lines of credit or getting larger loans as your credit score begins to improve. In some cases, individuals can even get their score back to where it was before the bankruptcy within 5 years of filing.

Chapter 13

Often considered to be ideal for people who have a source of income and a desire to repay their debts, but because of life circumstances or high-interest rates are unable to do so. Chapter 13 will re-structure debt instead of eliminating it as chapter 7 does. Most often, people considering this option are expecting a life change like a promotion or new job, and the debt is only difficult to manage for the time being. This plan will also allow for the debtor to keep most assets, as the debt will not be eliminated, simply made more manageable. The court will create a plan for the debtor to pay off the debts and will dictate the new terms of the loan. This can be a huge benefit to the debtor, as the creditors will not have a say in new interest rates or payment schedules. The debtor is also protected from any wage garnishments, lawsuits, or contact by the creditor.

Chapter 13 will stay on an individuals credit score for 7 years after the filing and the initial impact to a credit score will not be as large. As with chapter 7, it is still possible to bring your credit score back up. However, this type of bankruptcy should really only be considered by individuals that will be able to make the payments on the re-structured debts.

Chapter 11

Chapter 11 bankruptcy is almost exclusively used by corporations who want to continue business. Similar to chapter 13, debts will be repaid through a court-approved reorganization plan. For individuals who own shares in a company or even own their own business, going into chapter 11 is not the end of the company, merely an attempt to get back to profitability. Options vary for companies under chapter 11 on how to deal with the debt, whether that be a simple re-structuring or a discharge of some contracts and debts while others are repaid.

What Can I Do?

Whatever situation you find yourself in, declaring bankruptcy does not necessarily mean the end of the world. Some situations of overwhelming debt call for extreme action like bankruptcy and your wellbeing is something to consider in these situations. If you cannot afford even basic necessities because of your debt, it may be time to consider bankruptcy. Although you may be able to find bankruptcy petitions that you can file by yourself online, it is still the best option to contact a bankruptcy attorney. Having someone experienced in bankruptcy can first help you evaluate if it is the best option first, and then help you with the petition itself. It is not uncommon for people to keep their most important assets when they have assistance in these cases.

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