The U.S. Bankruptcy Code is organized into chapters, and several of these chapters refer to different types of bankruptcy. In order from highest to lowest frequency, Chapters 7, 13, and 11 are the most common types of bankruptcy filed each year in the United States. Another type of bankruptcy available to individuals is Chapter 12, which is similar to Chapter 13 but reserved specifically for family farmers and fishermen. Because it is rare, we will not be discussing it in this blog, but you can learn more about it here.
Chapters 7, 11, and 13 all serve the same purpose: to help consumers and businesses achieve relief from debt. However, the exact process, benefits, and drawbacks differ depending on which chapter you file.
Let’s take a look at a few of the major goals people have when filing bankruptcy and how each of these three chapters may (or may not) accomplish them.
Quickly Eliminating Debt
Is your goal to wipe out debt as quickly as possible without making any more payments? If so, Chapter 7 may be more appealing than Chapter 13 or 11.
Chapter 7 typically takes 4-6 months. As such, it is the fastest and simplest form of bankruptcy. Furthermore, Chapter 7 does not involve a payment plan, which means you can achieve your debt discharge without making any more payments.
However, the automatic stay will lift once the bankruptcy case is over. As such, you might still lose your home or vehicle if you haven’t caught up on payments. This is why people who are trying to rescue their assets opt for Chapter 13, which involves a 3-5-year repayment plan. By including missed payments in this plan, they can catch up by the end of this period and stay safe from foreclosure or repossession.
Chapter 7, on the other hand, only provides 4-6 months of protection, which is why it is not as effective for those hoping to avoid foreclosure or repossession.
Furthermore, Chapter 7 involves a liquidation process. If you have a very expensive vehicle, a substantial amount of equity in your home, or other high-value assets, the trustee may sell these assets to repay your creditors. The equity, assets, funds, and other possessions you can protect will depend on the state or federal exemptions you claim when you file your Chapter 7 petition.
Chapter 11 may or may not involve liquidation. However, it is generally for business entities, which means your personal assets are likely not on the line. Consumers may file Chapter 11 if they don’t qualify for Chapter 7 or 13, but their reorganization plan may result in the loss of assets if they cannot repay enough of their debt.
Rescuing Your Business
Chapter 11 is generally the best way to alleviate your liabilities without going out of business. This is because Chapter 7 typically results in the liquidation of the entire company, and Chapter 13 is not available for business entities. If you are running a sole proprietorship, however, Chapter 13 might be a viable option.
In the past, Chapter 11 has only been helpful to corporations and other heavily-resourced businesses. However, Congress recently passed the SBRA, which added Subchapter V to Chapter 11. Subchapter V is exclusively available to small businesses, and it involves a simplified repayment plan similar to Chapter 13. Learn more about this new reorganization option here.
Getting a Fresh Start
While each chapter differs in significant ways, all of them are designed to provide you with a fresh start. The U.S. government recognizes that even the most honest, hardworking individuals and business owners may find themselves with more debt than they could possibly manage. If you are struggling to make ends meet because of crushing debt, it is likely time to get in touch with an experienced attorney to discuss your bankruptcy options.
We Are Ready to Help You Achieve Financial Freedom
At Buchalter & Pelphrey Attorneys At Law, our attorneys have more than 45 years of experience assisting clients with a wide range of debt-related matters. We can conduct a comprehensive assessment of your financial crisis to determine which chapter of bankruptcy is right for you—or, if bankruptcy will not benefit you, which bankruptcy alternative may be a better option. At every point, you can trust us to prioritize your best interests and use our wealth of knowledge to provide the most effective recommendations.