What Type of Bankruptcy is Best For My Financial Situation?
If you are thinking about filing for bankruptcy, whether you are an individual or business owner, you are most likely unsure of which chapter of bankruptcy is best for your financial situation. The answer to this question involves many factors.
When Does A Chapter 7 Bankruptcy Make Sense?
If it makes sense for your financial situation, a Chapter 7 bankruptcy has many advantages. Chapter 7 can be used by both individuals and corporate entities, and it generally makes sense for an individual to file a Chapter 7 bankruptcy if a couple of qualifications are met:
First, in order to file a Chapter 7, you must address the Means Test, which means that you either earn under the median income for your household size in the state in which you live, or you make over the median income but can use certain deductions to pass the Means Test.
Second, a Chapter 7 makes sense if you do not have significant assets with equity that you wish to keep. For most people, the most significant assets they own are their home and car(s). In many circumstances, the home — or even multiple properties — and a car(s) can be protected from liquidation. However, if the home has a large amount of equity, that equity has to be addressed before a Chapter 7 is filed in order to ensure it is either protected or a plan is in place to address the equity. Otherwise, the Chapter 7 Trustee has the ability to sell the home and distribute the proceeds to creditors.
Third, a Chapter 7 makes sense if most of your debts are “general unsecured debt,” which includes personal loans, credit cards, medical bills and unsecured personal guaranties for business loans. These kinds of debts will be discharged in the Chapter 7. Other kinds of debts such as secured debts are subject to discharge of the personal liability, but not the underlying lien. For example, if you own a home that has little to no equity, your personal obligation to pay the home is discharged in a Chapter 7, but if you do not pay the mortgage, the home can still be foreclosed upon by the secured creditor. The same applies to a car with a car loan.
Even if you have significant equity in an asset, a chapter 7 may make sense if you wish to walk away from that asset without future liability. For example, if you own a boat that is underwater and wish to surrender the boat and not owe any additional amounts after the surrender, a Chapter 7 bankruptcy can be a good way to walk away from the boat debt.
A Chapter 7 may make sense for a business that wishes to shut down as it can provide an orderly fashion to do so. In a business Chapter 7, the Chapter 7 Trustee sells assets it determines can net value to distribute to creditors.
When Does A Chapter 13 Bankruptcy Make Sense?
A Chapter 13 bankruptcy makes sense in many circumstances that a Chapter 7 does not. First, if you cannot meet the requirements of the Chapter 7 Means Test, a Chapter 13 is a good choice as it provides the benefit of the automatic stay and can allow only a percentage of your general unsecured debts to be paid back. If you are behind on your mortgage and wish to pay it back over time, a Chapter 13 Bankruptcy can provide the opportunity to stop a foreclosure and pay back the arrears over 3-5 years, allowing you to keep your home.
Chapter 13 can also be used to pay back arrears owed on a car, boat, or any other secured debt. A Chapter 13, under certain circumstances, can also lower the amount you pay for your car or other secured asset and can strip statutory liens, which cannot be done in a Chapter 7. Chapter 13 also provides the benefit of the co-debtor stay which provides the benefit of the automatic stay for someone who is not filing under Chapter 13 but is liable for a debt that you owe. Finally, if you have significant equity in property that cannot be protected in a Chapter 7, a Chapter 13 can allow you to keep that property.
Chapter 13 is in many ways a more powerful chapter of bankruptcy and it has many advantages that Chapter 7 does not.
When Does A Chapter 11 Make Sense?
A Chapter 11 bankruptcy makes sense for an individual that is over the debt limits for a Chapter 13 or for a business that needs to restructure its debts. Chapter 11 is the most complex chapter of bankruptcy, but it can provide a lifeline for individuals with large amounts of debt and businesses to start fresh and leaner.