Types of Bankruptcy

Bankruptcy can be used to either reorganize or get rid of your debts. Insolvency is simply when you are unable to pay your bills. This happens most often because your debts exceed your income.

This can happen for many reasons. This could be because you have lost your job or experienced a decrease in income. Job losses caused by the COVID-19 Pandemic are one example. Other cases involve unexpected expenses, such as medical bills, that could put people over the edge financially. There are some benefits to bankruptcy, including the possibility of putting an end to wage garnishments and foreclosures.

No matter how you got there, bankruptcy is not the right decision. To determine if bankruptcy is right for you, it’s important to consider all options.

What is Chapter 11 Bankruptcy?

The United States Courts states that individuals and businesses can file Chapter 11 bankruptcy. This type of bankruptcy typically involves a reorganization or restructuring of a company. The bankruptcy process allows the debtor to restructure and then implement a plan for paying back creditors.

A Trustee must approve the plan. The Trustee oversees the implementation and oversight of the plan to ensure that the business has the resources and income necessary to continue with it. Any remaining debts that are not discharged under bankruptcy will be canceled once the plan has been approved.

This is a very simple overview of the process of a Chapter 11 bankruptcy. They can be lengthy and require many legal proceedings for the trustee and creditors.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is different from Chapter 11. Chapter 7 is a liquidation plan. This means that a Chapter 7 bankruptcy does not include a repayment plan.

Chapter 7 allows you to liquidate assets to repay your debts. All remaining debts are eliminated from your bankruptcy.

Your income will determine whether or not you are eligible to file for this type of bankruptcy. Chapter 7 bankruptcy is possible if your income falls below the median in the state where you are filing. You must meet the income threshold to be eligible for Chapter 7.

However, you don’t need to give up everything in Chapter 7 bankruptcy. Exempt assets can be kept, including certain personal belongings. If you can continue making timely payments, you may be able to keep your car, home, and other assets.

The complexity of bankruptcy means that you have many options. You can decide what you want to keep and how the proceeding will proceed. To learn more about your particular situation, consult an experienced bankruptcy attorney.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy sounds similar to Chapter 11, as both have repayment plans. The biggest difference between Chapter 11 and Chapter 13 is that Chapter 13 allows people with regular income to adjust how they repay their debts.

Individuals who fail to pass the means test for Chapter 7 may have Chapter 13 as an option. Generally, Chapter 13 bankruptcy is for those who have enough income to make some debt payments but not enough to cover all of the debts.

The individual presents a repayment plan. The Trustee of a bankruptcy court must approve the plan. The Trustee usually has to make payments under the plan. This is why the individual must pay the Trustee. The Trustee’s office then pays different creditors.

Chapter 13 typically only allows you to pay off a portion of your debts. All secured and priority debts such as taxes and auto loans are fully paid. Unsecured, nonpriority debts such as credit card debt and medical bills, however, can only be partially paid. The remaining debts will be paid off if you complete your Chapter 13 repayment plan. This can take up to five years.

How do you know which type of bankruptcy is right for you?

This is a complicated question in personal and business finance. Talk to an attorney to better understand your legal and financial situation. An experienced attorney will quickly apply means tests and other information in your case to help explain your options.

The Impact of COVID-19 Bankruptcies

In the wake of the coronavirus epidemic, bankruptcies continue to be filed. It is possible that you will find hearings regarding cases being conducted via telephone or web conferencing, and not in person.

Your attorney should be contacted immediately if you are making payments on a Chapter 11 and Chapter 13 case or have been financially impacted by the pandemic. Your attorney can help you determine the best next steps. This could include temporarily changing your payments or filing motions in your case.

Some CARES Act modifications can be made to the way certain elements of bankruptcy are handled. It provides Chapter 13 debtors with a pathway to modify their payment plans if their income has been impacted by federal stimulus payments.

What Does Bankruptcy Do to Your Credit Score?

Your credit can be affected by any type of bankruptcy. It can affect your credit score for up 10 years depending on the type of bankruptcy filed.

The truth is, most people are already in default of many payments by the time they reach bankruptcy. This is a good reason to not let bankruptcy affect your credit score. There is a possibility that your credit score will rise again if you make timely debt payments and manage your finances better.

These are huge financial and legal decisions. Each has its pros and cons. If you decide to file bankruptcy, it is important to do so correctly. Talk to a lawyer to get all the information you need to make the right decision for your case.