Chapter 7 vs chapter 13 bankruptcy: What's the difference?
Chapter 7 allows you to quickly clear your debts, while chapter 13 lets you keep all of your property.
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Bankruptcy is a legal way for people or businesses who are no longer capable of paying back their bills to clear these debts and start over.
When a person files for bankruptcy, they legally declare that they are unable to pay their debts. If you're trying to consolidate your debts, learn which type of bankruptcy is the best option for you and consider what kind of legal help you will need.
There are different types, or "chapters", of bankruptcy for consumers and businesses. Typically you will only qualify for one or two different chapters, based on the nature of your debts.
Chapter 7 bankruptcy, allows you discharge, or eliminate, nearly all of your debt. However, in exchange, you will have to sell any valuable assets, like a house or car.
If you have a few assets that you want to keep, you may be able to file an exemption for items valued under a few thousand dollars. A bankruptcy attorney will be able to explain your state's rules for exemption.
Chapter 13 bankruptcy allows you to keep your property, but requires you to create a plan to repay some or all of your debt. For this reason, you need a regular income to successfully file chapter 13.
Many people who file for chapter 13 are employed homeowners who are unable to pay their mortgage debt. Filing for chapter 13 allows them to avoid foreclosure, and slowly pay back that debt over a number of years.
Chapter 11 bankruptcy is often an option for businesses that are LLCs, partnerships, or corporations. These businesses owe too much money to qualify for chapter 13 bankruptcy.
In chapter 11, the filer sets up a repayment plan and may continue to conduct business. This type of bankruptcy may take a long time to complete, and it is often expensive. This is why small business owners may choose chapter 7 or 13 instead.
While businesses can file for chapter 7 bankruptcy, they usually do not because this would require liquidating the business. Similarly, individuals may file for chapter 11, but they often do not choose to do so because the process is so complicated.
The biggest difference between personal and business bankruptcy is that individuals must pass a means test, while businesses do not. This test investigates whether a person qualifies for bankruptcy. Businesses that file for chapter 11 do not have to go through a means test.
When filing for bankruptcy, you must disclosure all of the debt you wish to discharge. These debts include
However, there are still some types of debt that you will need to repay.
If you have significant assets or if you own a business, hiring a bankruptcy attorney is essential. An attorney who knows all the rules involving bankruptcy can help you get through the process with as little material loss as possible. If you want to handle your case on your own, it is still wise to have an attorney review your documents before you file.
Those who file bankruptcy on their own run the risk of not accurately disclosing their debts or assets. If a case is improperly filed, it will be dismissed by the bankruptcy court, leaving the filer back where they started. However, an experienced bankruptcy attorney will be able to help you account for all of your debt, advise you on the best methods to keeping valuable property, or help you structure a reasonable repayment plan.
While bankruptcy may be stressful, having a legal advocate to effectively guide you will ultimately make the process much smoother than if you were to go it alone.