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Chapter 7, 11, Or 13: When Filing For Bankruptcy, What's The Difference?

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If you find yourself in a dire financial situation, you may come to the conclusion that filing for bankruptcy will allow you the best chance of economic recovery. While this may not be the appropriate course of action in every case, it can provide much-needed relief for many people. That said, if you do plan to file for bankruptcy, you'll need to have a good grasp on the different types of bankruptcy to determine which will be the best choice for your specific circumstances. Below, we'll explain some of the main differences between Chapter 7, Chapter 11, and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

Sometimes referred to as "straight" bankruptcy, this filing will typically discharge most types of unsecured debts (like personal loans or credit card debts). However, you may have to surrender certain types of nonexempt property or assets to pay off the debts you owe. Many people who file for Chapter 7 do get to keep all of their property, though; it really depends on your situation.

Filing for this type of bankruptcy will usually take a few months to complete. Note that filing for Chapter 7 can put a temporary hold on foreclosure, but will not permanently stop the process unless you can catch up with your mortgage payments. In addition, not everyone is eligible for this type of filing in the first place. If your income is less than the median of your state or you can pass the means test, you'll likely have the ability to file for Chapter 7. But many high-income earners are not eligible for Chapter 7 at all. If you do plan to file, you'll want to find an attorney to help you. The success rate for filing for Chapter 7 with an attorney's help is over 95%, but if you file on your own behalf, the approval rate is only around 60%.

Chapter 11 Bankruptcy

In general, Chapter 11 is used by businesses to restructure their debts and repay them over time. It's a reorganization filing that corporations and big businesses use. However, it can be used by small businesses and individuals as well. A benefit of Chapter 11 is that there's no time limit on this process. But it's more complex than other types of bankruptcy filings and for many individuals, it simply doesn't make a whole lot of sense to file for Chapter 11 (unless they have no other options available to them).

Did you know: there's actually a Chapter 12 bankruptcy too? Only very specific debtors can take advantage of Chapter 12. In fact, it's designed only for farmers and fishermen. For these individuals, Chapter 12 may offer more flexible repayment options, higher debt limits, and other options that Chapter 13 cannot.

Chapter 13 Bankruptcy

Like Chapter 7, a person will file Chapter 13 to eliminate their debts. But instead of taking away a filer's assets to repay those debts, Chapter 13 helps form a plan to repay at least some of their debts over a period of up to five years. This would allow a filer to keep their home out of foreclosure or hold onto property and still pay off their debts over time.

Of all the types of bankruptcy available, this one is often less traumatic for many people as it involves no property liquidation. While it takes a lot longer to resolve than Chapter 7, you'll get financial forgiveness that allows you to pay back debts over time without having to start again from scratch. Filing for Chapter 13 does require monthly payments, so debtors need to be readily employed and have a regular income to be eligible. If you are facing foreclosure, this is often the best way to actually stop the process and get rid of other debts at the same time.

Now that you know a bit more about the different types of bankruptcy, you can talk to a lawyer and explore the options that they recommend for your situation. For more information or to schedule a consultation to discuss whether bankruptcy might be the best step to take, contact us today.

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