What Bankruptcy Chapter Is Best for Me?Updated May 9, 2016 Bankruptcy
Bankruptcy is a big deal – and part of working through a bankruptcy case is ensuring you do everything possible to get a successful outcome. After all, bankruptcy is a financial tool that can help you dig out from debt and turn over a new leaf. Narrowing in on the right bankruptcy chapter from the start of your case is important because each chapter has its own process and eligibility requirements. While a credit counselor or attorney should be able to help you identify the best bankruptcy chapter for your financial situation, it’s good to have an idea of what you may qualify for and what it includes before you head to the courtroom.
I Have Low Income and Can’t Make Payments
A 2011 bankruptcy study found that most people (60 percent) who petition the court for bankruptcy have annual incomes of $30,000 or less. Why? It’s likely that many people in lower income brackets have a harder time weathering unexpected life situations, like medical bills, accidents, job layoffs or loss, and death in the family. Each of these factors, along with others, can create financial setbacks that quickly add up and overwhelm. People who make less than their state’s median income are often able to file chapter 7 bankruptcy, which allows a court trustee to sell off a filer’s personal property to help cover debts (called liquidation). In many cases, remaining debt that can’t be covered through liquidation is wiped away by a court because it would be financially overwhelming. Chapter 7 bankruptcy is limited to people in certain income thresholds, but there are other options for individuals who make more.
I Have High Income, But Struggle to Repay Debts
If your annual income is more than your state’s median income, don’t worry – you still can qualify for bankruptcy. Chapter 13 bankruptcy can be the best avenue for you, because it takes into account your income and ability to repay debts with some court assistance. This means you won’t have to face liquidation like chapter 7 bankruptcy, but you will be held to a strict repayment plan to help clear debt. Chapter 13 bankruptcy offers you support through a court trustee who can sit with you and creditors to determine how much money you owe, and how to go about repaying it. You may wonder why even file for bankruptcy if you’re still going to pay the debt that overwhelms you. With chapter 13 bankruptcy, repayment plans can last from three to five years instead of indefinitely, and you may end up repaying all or just a portion of your debt. These repayment plans also give you the chance to stall foreclosures or repossessions, and show creditors that you’re making an honest effort to pay your debts.
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I Operate a Small Farm or Fishery
Farmers and fisherman are provided with their own bankruptcy chapter to help them absorb losses and financial hardships associated with their industries. Farming and fishing can be volatile industries and the government recognizes that it’s easy to accumulate debt while handling day-to-day operations, especially during rough weather or bad markets. If you own a family farm or fishing business that supplies most of your family’s income, it’s likely that chapter 12 bankruptcy is a good option for you. Chapter 12 is different from other kinds of bankruptcy aimed at businesses and corporations because it accounts for farmers’ needs, and allows them to file larger amounts of debt that can be wiped away.
I Run a Business or City That Needs Relief
There are several chapters that businesses, corporations, cities, schools and hospitals can file for, but chapters 9 and 11 specifically provide assistance. Chapter 9 bankruptcy is for cities that need help with their debts, and offers specific provisions for wiping away debt so long as city and town trustees make honest efforts to solve debt issues with lenders. In any case, anyone filing chapter 9 bankruptcy should speak with an attorney to determine all the legalities in making the right decision. Chapter 11 bankruptcy is an option for businesses looking to reorganize – that is to keep operating while repaying debts instead of folding from financial burdens. Reorganization can be stressful because a court trustee temporarily makes all business decisions during the process, but the perks are that a business or corporation can continue operating and survive bankruptcy, and possibly thrive afterwards.
Every bankruptcy chapter has its own eligibility requirements and loopholes, and only a financial advisor or attorney can help you determine what’s best for your bankruptcy case. But, understanding the basics of the bankruptcy chapters can give you a leg up when it comes time to decide.