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Which Bankruptcy Chapter Should I File?

Which Bankruptcy Chapter Should I File?

If you’re considering bankruptcy, one of the most important choices you’ll make is which type to file. While all forms of bankruptcy aim to provide the filer with a fresh start, each has its own limits, potential, benefits, and drawbacks.

The chapters you’ll likely consider are:

  • Chapter 7. Commonly called “liquidation bankruptcy,” Chapter 7 requires a bankruptcy trustee to liquidate your nonexempt assets and use the proceeds to repay creditors before the court grants a debt discharge.
  • Chapter 13. Under Chapter 13, you will propose a repayment plan that uses all your disposable income. You’ll make payments to the trustee for 3-5 years, and the court will discharge whatever unsecured debt remains once you’ve completed this plan.
  • Chapter 11. Chapter 11 is mostly for businesses, although some high net-worth individuals may choose Chapter 11 because they don’t qualify for Chapter 7 or 13. Chapter 11 reorganizes debt into a repayment plan, after which the court may discharge remaining unsecured debt.

To choose between these chapters, you’ll need to assess your situation and determine which form of bankruptcy will most likely accomplish your goals.

The following 5 questions may help you come to a sound decision. As always, this is intended as general information, and it can never replace personalized guidance from our qualified team at Bach Law Offices. Please do not hesitate to reach out to us with questions or concerns.

1. Is My Debt Dischargeable?

Bankruptcy only discharges unsecured debt (e.g., medical bills, credit card debt, utility bills, personal loans, etc.). Even then, some types of unsecured debt are considered untouchable.

Filing bankruptcy will most likely NOT get rid of the following:

  • Mortgage debt
  • Automobile loans
  • Tax debt
  • Student loans
  • Criminal fines/penalties
  • Child support/alimony
  • Compensation you owe to someone for damages you caused them while you were driving under the influence

If most of what you owe falls under these categories, Chapter 7 bankruptcy won’t be very helpful to you. Like other forms of bankruptcy, Chapter 7 will provide temporary relief from collection attempts, but this relief will only last for the duration of the proceeding (4-6 months). After that, you will still be responsible for the above debt.

Chapter 11 or 13, however, can allow you to restructure your debt into a more manageable repayment plan. You can catch up on debt like mortgage arrears and back taxes while protecting yourself from lawsuits, foreclosure, and more.

2. What Assets Do I Own?

Is your income too low to pay your bills? Friends or family may have suggested selling your possessions to make ends meet. But what if you’ve already done this? What if all you have is what you need to live a normal life?

You may be able to file what’s called a Chapter 7 “no-asset” case. Normally, the Chapter 7 trustee will liquidate your property and use the funds to pay your creditors, but state and federal exemption laws allow you to protect your most vital possessions. If you can claim everything you own as exempt, the court can discharge your unsecured debt without taking any of your property.

If, however, you own expensive jewelry, multiple cars, and a vacation home, filing Chapter 7 will jeopardize these possessions. This is when you’ll want to consider Chapter 13 or 11 instead, both of which allow you to create a repayment plan and, generally, keep everything you own.

3. Do I Have a Steady Income?

You may believe a debt repayment plan isn’t right for you. If you could pay your debt, wouldn’t you have done so already?

But bankruptcy is meant to assist people in positions like yours. This is why the Chapter 13 plan, for example, is based on your income and expenses, rather than the amount you owe. If your income is consistent enough to make payments for 3-5 years, you can benefit from a debt discharge without jeopardizing your assets through the Chapter 7 liquidation process.

If your income is inconsistent, however, or it’s lower than the state’s median income for your household size, Chapter 7 may be a more practical option.

4. Is My Goal to Save My Business?

If your business debt has become unmanageable, you generally have three options:

  1. Liquidate your company through Chapter 7 and start fresh;
  2. Restructure through Chapter 13 (ONLY if you are a sole proprietor); or
  3. Restructure through Chapter 11.

You may have heard that Chapter 11 is best for corporations and other large businesses because of its costs and complexity. While this is true, Congress added a new path to Chapter 11 in February of 2020: Subchapter V. Subchapter V is a streamlined and affordable version of Chapter 11 that is exclusively available to small business owners. If you qualify for Subchapter V, you can likely reduce your debt without going out of business.

5. How Soon Do I Need Relief?

The length of the bankruptcy process depends on the type of bankruptcy you file. Chapter 7 typically takes less than 6 months, while Chapter 13 lasts for the duration of the 3-5-year repayment plan. Chapter 11 can take even longer, depending on the size of your business. If you need relief from debt as quickly as possible, Chapter 7 may be the right option for you.

Ready for Personalized Support?

Your answers to these questions may give you a better idea of how bankruptcy may affect you and which chapter might be the most appropriate for your situation. At Bach Law Offices, we know the common pitfalls that prevent people from securing maximum benefits from bankruptcy. Before recommending a certain path, we will take the time to fully understand your situation and explain all consequences—both positive and negative—of filing bankruptcy.

Financial freedom is closer than you think. Call (847) 448-0025 or contact us online today.

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