What Chapter Bankruptcy should I File?

What types of bankruptcy are available.

Different sections of the bankruptcy code are referred to as “chapters.” The chapter you file under has a major impact on how the case proceeds, and what can be accomplished. Individuals usually file either Chapter 7, sometimes called “straight bankruptcy” or Chapter 13, which involves a payment plan. Farmers can also file under Chapter 12, which is similar to a 13, but has some special protections. Chapter 11 is usually used for business reorganizations, but is sometimes used by individuals who don’t qualify for either a 7 or a 13.

DISCLAIMER: One of the main things a bankruptcy attorney does during a consultation is to advise the client about what chapters are available, and which chapter would best serve the client’s needs. This is a very individual process – one size doesn’t fit all – and this summary shouldn’t be used as a substitute for obtaining proper legal advice.

Chapter 7 Bankruptcy

Chapter 7, sometimes called “straight bankruptcy” is filed for the primary purpose of seeking a discharge from your debts. Debtors are allowed to keep a certain amount of property, which is exempt from creditor claims; these exemptions vary from state to state. Most people who file Chapter 7 are able to exempt all of their property. In Chapter 7, an individual can choose how to treat secured creditors (those that have a mortgage on a home, are holding the title to a car, or something similar). Those debts can be reaffirmed, which means that they will still be paid, or abandoned, which means that the debtor is discharged, however the creditor will still have rights in the particular property they hold as security. There are income limits, which determine whether you can file under Chapter 7. If your income is under the median income for your state, you are always eligible; if you are over, it depends on the amount of secured debt, among other factors.

Chapter 7 works well when the main reason for filing is to discharge unsecured debts: things like credit cards, personal loans, or medical bills. With some exceptions, most of these debts can be discharged. The most common debts that cannot be discharged are support obligations, certain types of taxes, and student loans (unless significant hardship can be shown).

Chapter 11 Bankruptcy

The most widely publicized Chapter 11 cases involve large corporations, such as G.M. or Exxon. Chapter 11 can also be used by small businesses, or individuals, particularly when neither Chapter 7 nor Chapter 13 is appropriate or possible for them.

Chapter 12 Bankruptcy

Chapter 12 is limited to family farmers or fisherman. As is the case in a Chapter 13, a plan is filed, proposing to pay off debts over a 3 to 5 year period. Chapter 12 is more flexible than Chapter 13, allowing family farmers to continue operating while they seek a financial resolution.

Chapter 13 Bankruptcy

In Chapter 13, the debtor files a plan, proposing how they will pay their debts. The plan must represent their best effort to pay over a 3 to 5 year period. The plan includes regular payments to secured creditors (such as a car loan or mortgage), and can provide for additional payments on these loans, if you are behind in your payments. The idea is to get caught up by the end of the plan. Unsecured creditors may, depending on circumstances, be paid a partial amount in the plan.

Chapter 13 is often used where the debtor is behind on secured debts, such as a mortgage, and the problem cannot be solved by negotiation with the creditor. A Chapter 13 can be used to force the bank to accept a plan, if it is confirmed (approved) by the bankruptcy court. Chapter 13 is also used when the debtor is not eligible for Chapter 7. Some persons may not be eligible for a 7 because of of their income, or because of a prior bankruptcy case (within 8 years, if the prior case was under chapter 7). Other reasons for filing Chapter 13 include having assets that are worth more than the exemptions which are allowed in Chapter 7, or debts that are not eligible for a Chapter 7 discharge.

When Should Bankruptcy Be Avoided

Bankruptcy is not for everyone. Some person might be better served by other options, such as payment plans or settlements. Chapter 7 might be a bad choice for someone who owns assets that are more than he or she can claim as exempt. A Chapter 13 might be a bad choice for someone who cannot afford to make the required payments.

If you don’t intend to tell the truth on your schedules (or at the hearing), you should stay far away from the bankruptcy court – there are federal crimes involved!

Do I Need An Attorney To File Bankruptcy?

Although you can file without an attorney, most people find that having an experienced bankruptcy lawyer is worthwhile. An attorney can provide individual advice, and guide you through the process.

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