The effects of filing bankruptcy can vary widely depending on the type of bankruptcy and the terms you agree to. If you’re dealing with significant debt, knowing how a chapter 7, chapter 11, or chapter 13 bankruptcy would affect your situation will help you make the right choice.
Chapter 7 bankruptcy is the most common kind of bankruptcy, and also one of the most straightforward. When you file for chapter 7 bankruptcy, a trustee oversees the process of liquidating your assets. The trustee then takes the proceeds and uses them to pays off as much of your debt as possible.
Even if you have far more debts than available funds, you're not responsible for paying any remaining debt once your assets have been liquidated. Most remaining debts will simply be canceled. Not all debts will go away, however. You'll still be responsible for child support, student loan debt, fraud, recent major purchases, criminal fines, and contractual purchases relating to land or cars.
The negative effects of filing bankruptcy under chapter 7 include your credit score dropping by 100 points or more, and the bankruptcy filing remaining on your credit report for 10 years. But filing for chapter 7 bankruptcy can be a good option if you can’t repay existing debts, are in danger of being sued for unpaid debts, or can't file for chapter 13 bankruptcy.
Chapter 11 bankruptcy is also known as chapter 11 reorganization. This type of bankruptcy allows you to reorganize your debts so you can repay them over time.
Unlike chapter 7 bankruptcy, it doesn’t require you to liquidate assets or close your business. Some debts (but not all) are also forgiven as part of the chapter 11 process. If you file as an individual or small business, chapter 11 bankruptcy stays on your credit report for 10 years, and can cause an immediate drop in your credit rating.
Filing for chapter 11 bankruptcy can be a good option if you have a business that needs to continue operations during and after bankruptcy. That said, it’s usually better for individuals and small businesses to file for chapter 13 instead. Chapter 13 is cheaper, quicker, and easier to complete in comparison. Most of the main advantages of chapter 11, like the lack of a debt limit, only benefit large companies.
Filing a chapter 13 bankruptcy case involves reorganizing your debts, similar to chapter 11. You'll work out a debt repayment schedule that spans about 3 to 5 years and includes anywhere from 10 percent to 100 percent of your total debt. The amount you ultimately repay depends on the kind of debt, your income, and the total amount.
Some kinds of debt don't go away with a chapter 13 bankruptcy case. These include student loans, child support, and criminal fines. One of the other effects of filing bankruptcy under chapter 13 is that it stays on your credit report for 7 years. Chapter 13 also has a limit on the total amount of debt you can discharge, but this limit is fairly high and usually won’t be a problem for individuals.
Filing this type of case is a good option if some of your debts have cosigners, you've recently filed a chapter 7 bankruptcy case, or you can reasonably pay off your debts after restructuring. Unlike other types of bankruptcy, the fees related to chapter 13 filings must be court-approved. Even if you've agreed to pay your attorney a certain amount, the judge can force the attorney to refund excessive fees.