There are several different types of bankruptcy. Chapter 7 bankruptcy forgives debt and can be a good option if you don’t earn enough to pay back your debt.
However, it has serious consequences and will hit your credit for years to come. It is important to consider other options before declaring bankruptcy.
Chapter 7
For many, bankruptcy is a way out of overwhelming debt. Typically, you qualify for Chapter 7 bankruptcy if your income is less than the average state income for families of similar size and if your debts outweigh your income.
Once you file, a temporary stay is put on collection activities. This means that creditors cannot call, wage garnishment stops and foreclosures stop. In addition, some types of property can be protected from sale (exempt property) and some debts are discharged, including credit card debt, medical bills, personal loans, and some tax debts.
Keep in mind, however, that you’ll lose your credit cards and you’ll likely not be able to get a new mortgage for several years. You’ll also be required to surrender non-exempt property for distribution to your creditors, and specific debts like child support and alimony can’t be discharged in Chapter 7. Nevertheless, it can give you a fresh start. You’ll have to reestablish good financial habits after you emerge, such as building a livable budget and staying out of debt.
Chapter 13
A Harrisburg bankruptcy attorney can meet with you in person, through teleconference, and email. Here are some things to keep in mind if you decide to file for Chapter 13 bankruptcy. But keep in mind that a lawyer will have the knowledge and expertise to help you with everything you need to know.
Individuals can use Chapter 13 to restructure their debts, repay some of them over three to five years, and have the rest discharged. It’s available to wage earners, self-employed individuals, and sole proprietorships (one-person businesses).
It’s also a good option for homeowners facing foreclosure or repossession. Chapter 13 allows them to stop foreclosure proceedings and catch up on past-due mortgage payments.
Unlike Chapter 7, you must pass a means test before you can qualify for Chapter 13. This includes a requirement that your disposable income is sufficient to pay the lowest priority debts in your three- to five-year repayment plan. You must also have enough money to protect the value of any nonexempt property you want to keep.
Chapter 11
People and businesses file Chapter 11 to reorganize, creating and proposing a plan of repayment that must be approved by creditors. Unlike most other bankruptcy
chapters, the debtor-in-possession (the person or business filing) keeps control of its property during this process.
Unlike Chapter 7 bankruptcy, it offers homeowners the opportunity to catch up or “cure” mortgage payments and get rid of some debts, such as credit card balances and medical bills. However, it does not allow a homeowner to cram down a second or third mortgage, and unsecured debts such as child support, alimony, and back taxes must be paid in full.
Chapter 11 is only available to individuals, sole proprietorships, and partnerships; corporations, LLCs, and other businesses cannot file under this chapter. In addition, there are income and debt requirements that must be met to qualify for Chapter 11. An experienced bankruptcy attorney can quickly apply means tests and other information to your situation to help you understand your options.
Chapter 12
In a Chapter 12 case, the debtor proposes a plan to pay creditors over three to five years. The plan must include full payment of all priority claims. The debtor must also contribute all of their “disposable income” – discussed above – to the plan.
People may find themselves in a financially stressful situation for many reasons. Job losses caused by the COVID-19 pandemic, medical bills, or a reduction in income can put a person on the edge.
Bankruptcy can stop wage garnishments and foreclosures and help a debtor restructure their debt. However, it is important to understand the different bankruptcy types before deciding which one is right for you. The benefits and drawbacks of each type should be carefully weighed. In addition, other debt management options may be available. The bankruptcy attorneys at our firm can provide valuable insight to help you make the right choice.
