What Are The Different Kinds Of Bankruptcy?
Anna Baluch3-minute read
March 21, 2022
If you’re struggling financially and overwhelmed with debt, you may be a good candidate for bankruptcy. Bankruptcy is a legal process that can help eliminate all or part of your debt or help you repay a portion of what you owe.
The three types of bankruptcies include Chapter 7, Chapter 11 and Chapter 13. Let’s take a closer look at how each of them works.
Types Of Personal Bankruptcies
Chapter 7 and Chapter 13 are the two personal bankruptcies you can consider. A personal bankruptcy may be a good option if you’re an individual who is facing wage garnishment, being sued by debt collectors, and simply can’t pay your bills. Here’s how each type of personal bankruptcy works:
- Chapter 7: Also known as liquidation bankruptcy, Chapter 7 bankruptcy is for anyone with a limited income who can’t pay back at least some of their debts. During Chapter 7 bankruptcy, all of your possessions will be sold (including your house) to pay off unsecured debts like credit card debt and medical bills. While Chapter 7 can help you find financial relief, it’ll stay on your credit report for up to 10 years.
- Chapter 13: If you earn a sufficient income and aren’t eligible for Chapter 7, Chapter 13 (or wage earner’s bankruptcy) may be right for you. Chapter 13 involves a 3- to 5-year repayment plan where you’ll repay all or a portion of your debts. Once the repayment period comes to an end, your unsecured debts will be discharged. This means you’ll no longer be responsible for repaying them. You can expect a Chapter 13 bankruptcy to stay on your credit report for up to 7 years.
What Is The Difference Between Chapter 7, 11, And 13?
If you do some research on bankruptcy, you’ll likely come across Chapter 11. So, how does Chapter 11 differ from Chapter 7 and Chapter 13? While Chapter 7 and Chapter 13 are personal bankruptcies, Chapter 11 is typically for businesses that have an overwhelming amount of debt.
These businesses aren’t producing enough revenue to pay their bills and must either shut down operations or file for bankruptcy. When a business files for Chapter 11 bankruptcy, it creates a reorganization plan describing how it will repay its debt.
Is It Better To File A Chapter 7 Or 13?
Chapter 7 is typically the preferred bankruptcy for individuals as it’s more affordable and offers a relatively quick way to improve your finances. If you have a lower income, owe mostly unsecured debts like medical bills and personal loans, and don’t own an house, Chapter 7 makes the most sense.
If you have a higher income that disqualifies you for Chapter 7 and you can repay some of your debts, Chapter 13 may be the way to go. Chapter 13 may also be a viable choice if you own a home that you wish to keep.
Signs You’re A Good Candidate For Bankruptcy
Bankruptcy isn’t right for everyone. However, it may be a good choice if:
- Your wages are being garnished: This is when creditors are taking a certain percentage of your paycheck. Bankruptcy can stop wage garnishment.
- You depend on credit cards:If you don’t have the cash to pay for your bills and everyday expenses and rely on credit cards often, bankruptcy may be a smart move.
- You’ll take at least 5 years to pay off your debt: Calculate how much debt you owe in total. If you think it’ll take a minimum of 5 years for you to become completely debt-free, bankruptcy can provide you with faster relief.
- Your debts exceed your income: If you owe more than you make and can’t keep up with your finances, bankruptcy may help.
- You’ve exhausted other options: Bankruptcy should not be the first thing you do to get out of debt. View it as a last resort and only consider it you’ve already explored other options like debt settlement and debt consolidation with minimal to no success.
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