If you’re faced with mounting debts, pesky bill collectors, and not enough money to handle it all, you may be considering bankruptcy. But which bankruptcy chapter is right for you? Let’s take a look at the bankruptcy chapters that may help you get a fresh start:
For individuals seeking debt forgiveness, Chapter 7 and Chapter 13 bankruptcy are options. Chapter 7 bankruptcy allows you to discharge most of your unsecured debts (i.e. credits cards, personal loans) while Chapter 13 bankruptcy requires that you repay your debts over the course of three to five years. You’ll need to take the means test to determine which chapter is right for you based on your income. If the means test determines that you’re earning more money than allowed for Chapter 7 bankruptcy you’ll need to repay your debts in Chapter 13 bankruptcy. Let’s take a look at some pros and cons of each personal bankruptcy chapter.
Chapter 7 Bankruptcy
- The ability to discharge most unsecured debts such as credit cards, medical bills, personal loans, and utility bills.
- Creditors can’t seize your assets or property even if you make more money after your bankruptcy case is discharged (completed). One exception to this rule is when your income/assets increase right after bankruptcy and you knew that it would happen. For example, if you purposely delayed cashing a royalty check until a month after your bankruptcy discharge, this could qualify as fraud.
- The average bankruptcy filer is able to protect their personal belongings with bankruptcy exemptions
- Two to three years after bankruptcy, you may qualify for most mortgages.
- You can keep your primary home or car as long as you can make payments on the loan.
- Creditors can’t take any collection action against you while you’re in bankruptcy.
- You may lose personal property (i.e. car, house) if you’re unable to repay the loan.
- If you own luxury items that are not covered by bankruptcy exemptions, you could lose them at auction.
- It will be difficult to get a mortgage in the first 24 months after your bankruptcy discharge.
- You can’t discharge student loans (in most cases), child support payments, alimony, debts incurred because of a criminal conviction, and some taxes.
Chapter 13 Bankruptcy
- You can keep personal property such as a car and house as long as you remain on a repayment plan.
- You may be able to discharge some unsecured debt such as credit cards, medical bills, personal loans, and utility bills.
- If your circumstances change (i.e. job loss, illness, birth of a child), you may ask the bankruptcy trustee to adjust your payment plan.
- Creditors can’t take any collections action against while you’re in bankruptcy.
- All discretionary income must be used to pay your creditors.
- You can’t take out a loan during Chapter 13 bankruptcy without the permission of the trustee.
- Chapter 13 bankruptcy can be a long process, taking up as much as five years.
Personal vs. Business
If you own a business and want to file bankruptcy, you have two options 1) Chapter 7 which will allow you to discharge your debts and dissolve your company, or 2) Chapter 11 bankruptcy which will allow you to repay your debts and keep your company operating. Below are some differences between a personal bankruptcy and a business bankruptcy:
- Individuals filing a personal bankruptcy must take a means test to determine if they’re eligible for Chapter 7 bankruptcy or Chapter 13 while businesses don’t have this requirement.
- Filing a business bankruptcy doesn’t mean you must file personal bankruptcy as long as you have a properly setup LLC or corporation. However, you may still be personally liable for the business debts if you assumed personal liability when you took out the loan.
- Businesses do not receive bankruptcy exemptions. All business assets such as equipment and property will be sold by the bankruptcy trustee to pay off your creditors.
Speak with a bankruptcy attorney to find out if it’s best for you to file a personal or business bankruptcy.
There are several ways you can file bankruptcy, but to get the most out of your fresh financial start, you’ll need to choose the right chapter.