A serious medical diagnosis, such as cancer, can leave people with extremely high out-of-pocket medical costs. A divorce can reduce household income to a barely manageable level. A job loss can immediately inhibit a person’s ability to stay up on debts previously handled well. In addition to these situations, many companies can experience changes that negatively impact their ability to remain financially solvent. Filing for bankruptcy may be a good way for individuals or companies to get out from under their debt and get off to a fresh start. Understanding different types of bankruptcies is important when considering this approach.
What Is a Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy is a form of bankruptcy frequently utilized by consumers. In this type of plan, debts are consolidated under a repayment program. The program may last anywhere from three to five years and utilizes a trustee, who receives a certain amount of money from the debtor. The trustee then uses those funds to pay creditors.
It should be noted that Chapter 13 is most effective is people have a solid income and can easily afford to pay at least a portion of their debt. If they can’t, then they may want to choose a different type of bankruptcy.
What Is a Chapter 7 Bankruptcy?
For consumers, a Chapter 7 bankruptcy offers help by discharging debts. The U.S. Courts explains that Chapter 7 bankruptcies are generally simpler than other types of bankruptcies. They can also be completed in a relatively short period of time. Consumers who file for Chapter 7 relief may find many of their debts discharged in as little as a few months.
According to the American Bar Association, a Chapter 7 is referred to as a straight bankruptcy liquidation. This bankruptcy requires debtors to surrender all assets that are not exempt. Those assets can be sold and the money is paid out to the creditors. However, in the vast majority of cases, people are allowed to retain all of their assets.
It is important to understand that unsecured debts, like medical bills or credit card expenses, are usually eliminated through the Chapter 7 bankruptcy process. For this reason, people who have large amounts of unsecured debt may be best served by filing for a Chapter 7 bankruptcy.
Difference Between Chapter 7 and Chapter 13 At a Glance
- In Chapter 7, your nonexempt assets are subject to liquidation. In Chapter 13, your nonexempt assets will not be liquidated. When you file Chapter 7 bankruptcy, anything you own that is not exempt could be sold to pay your creditors. In most situations, the threat of liquidation is not a concern, since most people filing for Chapter 7 because there are laws that protect most individual’s assets. If any of your property is subject to liquidation, Chapter 13 bankruptcy may be a better option.
- In Chapter 13, you repay a percentage of all your unsecured debt. In Chapter 7, you do not repay most of your unsecured debt. Under either Chapter 7 or Chapter 13, your unsecured debts are discharged at the successful conclusion of your case, meaning that your creditors can no longer seek payment of these debts.
- In order to file for Chapter 7 bankruptcy, you must pass the means test. If you do not qualify under the means test, you still may be able to file Chapter 13. Chapter 7 bankruptcy is available to people whose income levels are at or near the state median income. Chapter 13 is available regardless of income.
What Is a Chapter 11 Bankruptcy?
A Chapter 11 bankruptcy is very similar to a Chapter 13 bankruptcy, but is more commonly utilized by businesses. Individual consumers, however, can file for this type of bankruptcy if their level of debt was greater than what is allowable by a Chapter 13 plan. As with a Chapter 13, debts are restructured, consolidated and paid back in a Chapter 11 bankruptcy.
Before making any firm decisions, people in Cincinnati and Northern Kentucky who are searching for help with debt and understanding different types of bankruptcies should reach out to get legal advice. Talking with an experienced bankruptcy attorney can help people understand what their options are and feel confident that they are making the right choice for their circumstances.