How to Decide Which Type of Bankruptcy to File

If you’re at the point where past due bills have been sent into collections and you don’t believe that you can  manage all of your debts with your current income, then it might be time to file for bankruptcy. Now the question is: which type of bankruptcy should you file?

You might have heard that there are various types of bankruptcy under federal law. They’re identified by “chapters” to coincide with their identification in the U.S. Code. Here’s a brief rundown of the various types bankruptcy so you can decide which one is right for you.

Chapter 7 Bankruptcy

Filing Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy. That’s because you’ll be required to liquidate your non-exempt assets to pay off your creditors.

When you file for bankruptcy under Chapter 7, some of your assets will be sold off by a trustee and the proceeds will be distributed to your creditors. However, most of your unsecured debt will be discharged. Usually, the whole process takes three to four months to complete.

Note that if you are currently “cash poor” — and, while you might not have the financial resources available to pay your bills, you still have significant assets or equity — then you could lose some of them if you file for Chapter 7 bankruptcy. Also, if you’re a high-income earner, you might not even be allowed to file for Chapter 7 bankruptcy.

If you’re an unemployed homeowner and your house is worth less than you owe on it, you should probably file for Chapter 7 bankruptcy.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is typically used by corporations and large businesses. If you’re planning on filing for bankruptcy as an individual, then Chapter 11 isn’t for you. However, if you own a business that’s having trouble paying off its creditors, talk to an attorney about the possibility of filing for bankruptcy under Chapter 11.

Chapter 12 Bankruptcy

Chapter 12 bankruptcy is designed for farmers and fisherman. If you’re not a farmer or a fisherman, then Chapter 12 bankruptcy isn’t for you.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is often called the “wage earners” or “reorganization” bankruptcy. Under that type of bankruptcy, you’ll repay some creditors in full and some in part. The whole process lasts three to five years and, at the end, many of your unsecured debts will be discharged.

The advantage of a Chapter 13 bankruptcy is that you don’t have to liquidate any of your assets. Instead, you submit a payment plan that’s approved by the court. The reason it’s sometimes called a “wage earners” bankruptcy is because you have to provide proof of income so that you can pay down the debts.

Chapter 13 bankruptcy can also stop a foreclosure on your property. That’s one of the best advantages of using it.

To qualify for Chapter 13 bankruptcy, your unsecured debts must be below $383,175 and secured debts below $1,149,525.

Essentially, if you’re an employed homeowner and you don’t want to lose your house, file for Chapter 13 bankruptcy.

Before making any decision about which type of bankruptcy to file, be sure to consult an attorney. Laws are known to change and attorneys keep up with the latest information in terms of case law and changes to federal law.