When you’re drowning in bills, bankruptcy can be the lifebuoy you need to get out from under burdensome debt. But there’s more than one type of bankruptcy, and you’ll want to understand each of so that you can select the best option for you. Whether you file for Chapter 7, 13, or 11 bankruptcy will depend on your income, assets, and what you’re trying to accomplish by filing the case.
The bankruptcy system was created under federal law to help individuals and businesses get a fresh start. A case begins with the filing of official bankruptcy paperwork (called a petition) in the bankruptcy court. In the petition, you disclose financial information, including your income, property, debts, and prior financial transactions.
Just because you tell the court about all of your assets doesn’t mean that you have to give up everything that you own, however. You’re allowed to keep (exempt) a certain amount of property. How much property you can keep varies according to the laws of your state.
Also, even though you must include all debts in your bankruptcy, too, not all debts get wiped out (discharged). You’ll remain responsible for nondischargeable debts—meaning that you’ll still have to pay them after your case ends. Examples of nondischargeable debts include alimony, child support, student loans, court-ordered restitution, and certain types of taxes.
(Learn more in Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)
Bankruptcy Chapters 7, 11, and 13
You’ll want to understand the problems each bankruptcy chapter works best to solve before making your choice. Because bankruptcy law is complicated, you’ll likely want to consult with an attorney when deciding what type to file.
Chapter 7 Bankruptcy
In Chapter 7 or liquidation bankruptcy, you keep your exempt property. The bankruptcy trustee—the official tasked with overseeing your case—conducts the sale of your nonexempt property and gives the money from the sale to your creditors. At the end of the case, the court issues a discharge.
The reasons that you might choose to file a Chapter 7 bankruptcy are too numerous to list; however, you might choose this type if you:
- don’t have nonexempt property
- don’t earn more income than the qualifying amount (means test)
- don’t mind if the trustee sells your nonexempt property, or
- have irregular income that’s insufficient to support a plan.
In most Chapter 7 cases, debtors don’t have any nonexempt assets that the trustee can sell. These “no-asset” cases conclude quickly and are less expensive than other forms of bankruptcy.
(Find out more by reading Chapter 7 Bankruptcy Basics.)
Chapter 13 Bankruptcy
In Chapter 13 or wage earner’s bankruptcy, you can keep all of your nonexempt property. However, you must agree to repay your creditors a certain amount every month for three to five years, depending on how much money you make and how much the property is worth (it must be an amount equal to the value of any nonexempt property that you keep). After completing the repayment plan, any dischargeable debt balances will get wiped out.
Chapter 13 bankruptcy offers some benefits that aren’t available in Chapter 7 bankruptcy. For instance, you can catch up on secured debt payments (such as mortgage or vehicle payments) in Chapter 13 bankruptcy by repaying the overdue amount through your plan. Since there is no repayment plan possible in Chapter 7 bankruptcy, your only choices are to catch up all missed payments in one lump sum (“redemption”) or relinquish the property to the creditor (“surrender”). You can also repay nondischargeable debts through your Chapter 13 plan, which, in some cases, can buy you more time than a creditor would allow outside of bankruptcy.
Choosing to file a Chapter 13 bankruptcy might be a good idea if you:
- want to keep property that you would lose in a Chapter 7 bankruptcy
- make enough money to repay some of your debt (and therefore don’t qualify for Chapter 7 bankruptcy)
- need to stretch out payments on a nondischargeable debt, or
- want to keep a house or car by catching up on arrearages.
Chapter 13 bankruptcy also has some drawbacks. People often find it challenging to stick to a repayment plan lasting three to five years. This form of bankruptcy is also more expensive and more complicated that Chapter 7 bankruptcy.
(For further details, read Chapter 13 Wage Earner Bankruptcy Basics.)
Chapter 11 Bankruptcy
There are debt limits in Chapter 13 bankruptcy. If the amount of debt exceeds the cap, you won’t qualify for Chapter 13 bankruptcy and instead, will have to turn to an individual Chapter 11 bankruptcy. However, this chapter is very expensive and paperwork-intensive, so it is usually wise to explore all other options with a bankruptcy lawyer first.
(You can learn more about this chapter in What Is an Individual Chapter 11 Bankruptcy?)
Questions for Your Attorney
- What type of bankruptcy would be best for my situation?
- Is any of my property nonexempt and, if so, should I file for Chapter 13 bankruptcy?
- If I file for Chapter 13 bankruptcy, how much will my Chapter 13 plan payments be?