While it's often seen as a last resort, bankruptcy provides legal protection and a clean slate to both individuals and businesses. However, understanding which type of bankruptcy to file can be crucial for achieving the desired outcome. In the U.S., there are primarily three types of bankruptcy that individuals and businesses can file with the help of a consumer bankruptcy attorney: Chapter 7, Chapter 11, and Chapter 13. Each type serves a different purpose and caters to different financial situations.
1. Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is often the most straightforward type of bankruptcy for individuals. The primary benefit of Chapter 7 is that it provides a quick way to discharge most of your unsecured debts, such as credit card balances or medical bills, by protecting your assets through state exemptions. Individuals must pass a means test to qualify for Chapter 7, which determines if their income is low enough to file under this chapter.
2. Chapter 11 Bankruptcy
Chapter 11 bankruptcy is predominantly utilized by businesses, though individuals with significant debts may also file. According to U.S. Courts, Chapter 11 bankruptcy allows businesses to reorganize their debt and rebuild a better business. This type of bankruptcy provides a chance for businesses to negotiate new terms with creditors, potentially altering repayment schedules and interest rates. It is often seen as the best option for companies that hope to emerge from bankruptcy stronger and continue operations. The reorganization plan must be approved by the creditors and overseen by the court with the assistance of a consumer bankruptcy attorney.
3. Chapter 13 Bankruptcy
Chapter 13 bankruptcy is often referred to as the "wage earner's plan" because it allows individuals with regular income to develop a plan to repay all or part of their debts over three to five years. This type of bankruptcy is particularly useful for individuals who are behind on mortgage payments, as it can help them stop foreclosure. Unlike Chapter 7, Chapter 13 allows filers to keep their property, making it a suitable option for those wishing to protect significant assets. The debtor makes payments to a trustee, who then distributes the money to creditors based on the terms of the repayment plan.
Understanding the differences between Chapter 7, Chapter 11, and Chapter 13 can guide individuals and businesses toward the right choice for their financial future. Each chapter serves unique functions, whether it's the liquidation of assets, reorganization of a business, or repayment of debts over time. Consulting with a consumer bankruptcy attorney can provide additional guidance tailored to your specific situation. Call Wiley & Jowers today!
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