When someone finds themselves in financial distress, they may consider filing for bankruptcy. But just like choosing a doctor or an in-law, not all forms of bankruptcy are the same and selecting the wrong one can wind up doing more harm than good.
Which type of bankruptcy should you take? The options include Chapter 7, Chapter 11, and Chapter 13. Every case is different, which is why you need a competent bankruptcy attorney to help determine which type of bankruptcy fits your circumstances.
So, how do you choose which bankruptcy is right for you? To help you in making an intelligent choice, this blog discusses the different types of bankruptcies along with their pros and cons so you can choose which one best suits your financial situation.
Bankruptcy Defined
When a business or an individual cannot meet financial responsibilities or pay to creditors, there is an option to declare bankruptcy. Bankruptcy is a legal process to discharge debt and starts with a bankruptcy petition filed in court. Federal courts have exclusive jurisdiction over bankruptcy cases. As such a bankruptcy case cannot be filed in a state court. Bankruptcy laws are in place to protect not just the debtor, but also the creditors. There are several types of bankruptcy.
The common bankruptcy cases are filed under the three main chapters of the Bankruptcy Code, which are Chapter 7, Chapter 11, and Chapter 13. Let us examine each of them in depth.
Types of Bankruptcy
What type of bankruptcy is chapter 7?
Liquidation is the focus of Chapter 7. If you can’t pay your bills, Chapter 7 allows you to sell your possessions to pay your creditors. Individuals and corporations can choose this option, but they must pass the Chapter 7 Means Test to calculate their monthly discretionary income. They can file for Chapter 7 if their disposable income is low enough.
Advantages and Disadvantages of Bankruptcy Chapter 7
Advantages of Chapter 7 Bankruptcy
- Bankruptcy wipes out all debts and gives you a fresh start. Only student loans, taxes, and past-due child support are non-dischargeable.
- After filing for bankruptcy, most people may apply for credit cards and auto loans. Most credit card require a security deposit to start an account.
- The process usually takes 2–4 months. You will be required to attend a creditors meeting and answer questions about your debt.
- Filing a Chapter 7 bankruptcy is not costly. Some think it’s worth paying for peace of mind.
- Bankruptcy instantly halts collection efforts, judgements, and repossessions and allows an opportunity to renegotiate or be forgiven.
- Filing a petition stops creditor calls and harassment. All creditors must now go through your bankruptcy attorney or the court-appointed trustee.
Drawbacks of Chapter 7 Bankruptcy
- A bankruptcy can last up to ten years on your credit report. Despite this, you may instantly start repairing your credit.
- You can only re apply for Chapter 7 bankruptcy once every six years. Otherwise, filing a Chapter 13 repayment plan may be an option if you run into more financial issues.
- Each exception has a limit. You must pay the excess to the court if it exceeds the sum set.
- The legal procedure is intimidating and embarrassing for some. One or more creditors may contest your discharge, so be prepared to go to court at least once.
- Secured debts can be discharged. However, the creditor can take bacy the property or you can agree on a settlement price.
Overview of Chapter 13 – Reorganization
Unlike Chapter 7, Chapter 13 allows the filing party to keep most of their property and assets. Individuals, not corporations, can file for Chapter 13 bankruptcy, which restructures debts into reasonable repayment plans.
Advantages and Disadvantages of Bankruptcy Chapter 13
Advantages of Filing Chapter 13
- You can pay your creditors over time. You’ll have more time to earn more money and improve your spending habits if you’re behind on your payments.
- You can lower your debts. You may not be compelled to pay the whole amount due in rare cases. Creditors are not entitled to receive the full amount owed to them once a repayment plan is approved by the bankruptcy court.
- You may erase defaults and late payments from your credit report. If you have trouble paying your bills, filing for Chapter 13 bankruptcy might help you get back on track.
- As long as you make payments, you may retain your property. Mortgage and other secured loan defaulters will benefit from this initiative.
Drawbacks of Filing Chapter 13
- Chapter 13 bankruptcy is reported for seven years. You can rebuild your credit during this time.
- Chapter 13 bankruptcy does not discharge all debts. Student loans, child support, and spousal support are some unpaid debts after a Chapter 13 bankruptcy.
- It will take roughly 3-5 years to repay your debt. Chapter 13 bankruptcy requires a long-term commitment.
Chapter 11 – Business Bankruptcy
Chapter 11 bankruptcy is often used to restructure a business or organization. Businesses develop a strategy for continuing business operations while repaying their debt, which both the court and the creditors must approve.
Certain persons, like real estate investors, who have too much debt to qualify for Chapter 13 and possess many high-value properties and assets, may also elect to file under Chapter 11.
Advantages and Disadvantages of Bankruptcy Chapter 11
Advantages of Filing Chapter 11
- Your company can continue to run. You can keep working until your company’s obligations are repaid.
- Creditors will quit calling. The automatic stay gives you a much-needed respite from continuous calls to concentrate on a strategy.
- Manipulate some debts. Your company may try to renegotiate leases, contracts, and other agreements.
- You can receive relief. Your company can benefit from more time, flexibility, and the chance to cancel obligations and contracts.
Drawbacks of Chapter 11 bankruptcy
- A costly and lengthy Chapter 11 bankruptcy. As a result, many small firms seriously contemplate Chapter 11 over Chapter 7 or 13.
- Even with the cost and time required for Chapter 11, it is not exclusively for big businesses.
You can’t just file. Choose whether Chapter 7 or Chapter 13 is right for you with the help of the Law Office of Clark Daniel Dray.
It’s best to get legal advice from the beginning. So whether it is Chapter 7 or 13— bankruptcy demands careful consideration. It is a really difficult choice to make to file bankruptcy because it can affect you for the rest of your life but there is hope to redeem yourself financially if you get proper advice from professionals.
Hiring a bankruptcy lawyer at The Law Office of Clark Daniel Dray can make all the difference in how your case plays out. If you want bankruptcy information on Chapter 7 or 13, call 303-493-9908. Schedule a legal consultation now with any of our Denver bankruptcy attorneys to provide you with honest legal advice and give you the best chance of financial recovery.
