Did you know that over 544,000 people filed for bankruptcy in 2020?
Few things in life are as stressful as severe financial problems. If you’re struggling with unpaid bills and debt, you might be wondering if bankruptcy is the right choice for you.
But before you Google “how to declare bankruptcy,” you first need to gather some basic facts. For example, did you know there are several different types of bankruptcy for individuals and businesses?
Keep reading to learn the different types of bankruptcy (and which one could be ideal for you).
Chapter 7 Bankruptcy
This is the most common type of bankruptcy and is often called “straight bankruptcy.” Here’s a quick overview of how Chapter 7 works:
- The court oversees the liquidation (sale) of your assets
- The funds are used to pay off your creditors
- You’re allowed to keep your house, vehicle, and retirement accounts
- Any leftover unsecured debt (medical bills, credit cards, etc) is erased
It’s important to note that some types of debt, such as student loans or back taxes, are not canceled through bankruptcy. It also cannot stop the foreclosure of your home, although it may delay it.
To qualify for Chapter 7 bankruptcy, the court must decide that you don’t make enough money to pay back your debts. This is based on the average income levels in your state.
Chapter 13 Bankruptcy
The second most common type of bankruptcy is known as Chapter 13. Rather than forgiving your debts, the goal is to help you pay them off.
Here’s how Chapter 13 works:
- The court approves a monthly payment plan you’ll use to pay off some (or all) of your debt
- You’ll pay off all secured debt and as much unsecured debt as possible over 3-5 years
- Any remaining debt at the end of the plan is discharged
A benefit of Chapter 13 is you get to keep your assets and “catch up” on past-due bills. It can also prevent foreclosure by allowing you time to catch up on your mortgage payments.
A drawback of Chapter 13 is that the court will put you on a tight budget and monitor your spending habits.
Other Types of Bankruptcy
Just because Chapter 7 and Chapter 13 are the most popular options doesn’t mean it’s the best choice for your circumstances. If you set up a meeting with bankruptcy lawyers, they’ll advise you of other types of bankruptcy that might be better suited to your needs.
These might include:
- Chapter 11: Similar to Chapter 13, but for businesses instead of individuals
- Chapter 12: Offers debt repayments plans to fishermen and farmers
- Chapter 15: Works with cross-border international issues and foreign debtors
- Chapter 9: Helps schools, counties, and cities to reorganize their financial obligations
For most individuals, Chapter 7 or Chapter 13 is ideal for their needs. Businesses, however, may benefit from one of the other options mentioned above.
Knowing When to Declare Bankruptcy
If you’re facing financial problems, bankruptcy may (or may not) be the right decision for you. Get familiar with the different types of bankruptcy and set up a meeting with a lawyer to learn more about your options.
Now that you know more about how to declare bankruptcy, what’s next? Our site is full of great tips and advice, so keep browsing!
