Which Is Better For Me: Chapter 7, Chapter 11, Or Chapter 13?
So, you think you need to file personal bankruptcy. Take a deep breath. While bankruptcy in most cases should be a last resort, it can give you a fresh start financially, removing the burden of debt and allowing you to rehabilitate your credit score.
The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13.
Chapter 7: Liquidation
What it is: Repayment of creditors through liquidation of nonexempt property.
Pros: You can eliminate the most unsecured debt in Chapter 7 bankruptcy (i.e. credit cards, medical bills, and personal loans). The process from filing to discharge of debts usually moves quickly (three to four months). Creditors are prevented from contacting you on prebankruptcy debt obligations during the pendency of the bankruptcy case.
Cons: Your credit cards will be canceled, and you may have to forfeit some of your property. Purchasing real estate will prove difficult for two to three years. The bankruptcy will remain on your credit report for up to ten years.
Consider if: You meet the income requirements and don’t have significant non-exempt assets.
Chapter 11: Business Reorganization or Liquidation
What it is: Repayment of creditors through reorganization or liquidation.
Pros: Typically geared toward businesses or individuals whose debt limits exceed those as allowed under Chapter 13, this can prove an effective mechanism for restructuring business liabilities. It can also be an effective instrument for selling a business as a going concern free and clear of liabilities. The entire process from filing the case to Chapter 11 plan approval can take up to six months, and sometimes longer depending the complexity of the reorganizational/sale plan. Creditors, like those in Chapter 7 and Chapter 13 bankruptcies, are prohibited from taking any action on the debts during the pendency of the case.
Cons: Fees associated with this type of bankruptcy can be considerable, again depending on the complexity of the case. Getting to the finish line on plan/sale approval can also take significant time.
Consider if: You are looking to sell the business as a going concern or restructure your company debts for a business you wish to retain, or your debt limits exceed those of Chapter 13 (for individuals).
Chapter 13: Adjustment Of Debts For Individuals With Regular and Stable Income
What it is: Repayment of creditors through monthly payments based on income less allowable expenses.
Pros: In most cases, you are able to retain all of your property, including non-exempt property. No further worries about creditor harassment and interest stops accruing during the pendency of the repayment plan.
Cons: It takes discipline to stick with the repayment plan.
Consider if: You’re living comfortably on your salary but have trouble making regular payments to your unsecured creditors. Would otherwise lose cherished property in a Chapter 7 bankruptcy.
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