The reality of bankruptcy is more than just losing a game of monopoly; it is a lot more severe in real life. Although it’s necessary for man folks, one should understand the pros and the cons to filing bankruptcy.
People file for bankruptcy for many reasons, some of which include; a divorce, death in the family, a medical emergency or a job loss. In 2018 alone, non-business filed more than 750,000 bankruptcies. Bankruptcy is necessary for many folks, so it’s important to understand the types of bankruptcies and which apply to your unique situation.
What are the Types of Bankruptcies?
Although the goal of bankruptcies is to clear money owed by a debtor that cannot afford to pay back, not all bankruptcies have the same purpose. There are six different types of bankruptcies. They are:
- Chapter 7: For Liquidation
- Chapter 11: Large Reorganization
- Chapter 12: For Family Farmers
- Chapter 13: Repayment Plan
- Chapter 15: For Foreign Cases
Most people glance through this list and zone out for Chapter 13. That’s okay. Chances are higher that you will most likely be dealing with Chapter 7 and Chapter 13 than others because they are the most common type of bankruptcy for individuals. As such, we won’t discuss Chapter 11, 12 and 15 bankruptcy.
Types of Bankruptcy: Chapter 7
Here’s an overview of your obligation if you want to file for Chapter 7 bankruptcy. We also wrote an in-depth Chapter 7 bankruptcy process article once you’re looking to file.
- Analyze your debt.
Chapter 7 bankruptcy does not wipe out debts such as recent tax debt, most student loan balances and child support obligations If you pledged collateral for a loan, the creditor has the right to take control of the property if you’re not current as at the time of filing for bankruptcy and after your case.
- Determine your exempted properties
Every state has laws that restrict the type of property that you are allowed to keep if you file for chapter 7 bankruptcy.
- Check if you’re eligible
You may have to take and pass the bankruptcy means test before you can qualify for a discharge.
- Reaffirm or redeem secured debts
You would have to continue paying your creditor if you pledged your property as collateral for a loan. When you file for a Chapter 7 bankruptcy, you will be asked to choose whether you want to reaffirm the debt (Continue paying the contract with the creditor) or redeem the property (pay the creditor in a lump sum).
- Fill out all necessary bankruptcy forms
You will fill a few pages of documents, in which you have to inform the court about your expenses, income, properties, prior transactions and debts. You are also required to disclose the transactions that occurred on your property up to ten years before when you filed for a chapter 7 bankruptcy.
- File the forms and pay all necessary fees
Your case officially starts when you file your petition. You can submit your forms at once as most people do, or opt for emergency filing; by completing only the necessary documents if you don’t have enough time. While filing your petition, you are required to pay a filing fee which you can choose to pay at once or in up-to four installments.
You can also apply for a waiver if you can’t afford to pay; the judge will review your application and issue the exemption if you meet the necessary qualification.
- Submit your document to a bankruptcy trustee.
The role of the bankruptcy trustee is to check if the information you provided is accurate. You may be asked to forward tax returns, profit and loss statement along with some other documents.
- Act on your secured debt
Before your case is closed, you will have to act on secured debt as you had stated when you filed your bankruptcy form. For example, if you indicated that you’d return a property, you have to make it available to the lender.
- Get your discharge
The court will issue you an order discharging all qualifying debt at the end of a successful bankruptcy. Once you get this discharge, your creditors no longer have the right to ask you for payment. You’re free!
Pros and cons of Chapter 7 Bankruptcy
- You will get a debt relief often within 90 days from filing
- It is the most affordable option
- You will get an exemption from taxes on unpaid debt.
- It can eliminate most of your unsecured debt.
- The success rate of chapter 7 bankruptcy is high; as such, those who file for it often follow through till completion.
- A chapter 7 bankruptcy will be on your credit report for ten years, thus causing severe damage to your credit report.
- Unlike a chapter 13 bankruptcy, you have to qualify for chapter 7 bankruptcy to get it.
- It ma be difficult and more expensive to get future credit opportunities.
- You may have to use some of your assets to pay off creditors because there is no protection for properties above the state exemption amount.
- On public record
Types of Bankruptcy: Chapter 13
- Take and complete a credit counseling course
You must take and complete a credit counselIng course from an agency approved by the US Trustee’s office six months before filing for Chapter 13 bankruptcy.
- Prepare the proposed Chapter 13 plan and fill necessary forms
You have to complete a large packet of document consisting of schedules, bankruptcy petition, and other required forms. You must disclose all your debts, property transfers, income, property and more. You are to draft and submit a proposed repayment plan; this is the crux of your Chapter 13 case. While filing your bankruptcy petition, you must attach a proof that you have filed tax returns in the last four years.
- Submit your document to a bankruptcy trustee
The court will assign a bankruptcy trustee to you. The trustee will review your plan and ensure that it complies with the law. The trustee also collects payments and distribute them to creditors, monitor your expense report and monthly income. The trustee will inform your creditors that you’ve filed for bankruptcy; this will stop most of your creditors from proceeding with collection actions.
- Make your plan payment.
Even if the court is yet to approve your payment plan, you have to pay. You must begin a month after filing your papers
- Meet with creditors and attend the confirmation hearing
The bankruptcy trustee will conduct a meeting with you and all your creditors in attendance. Your creditors and your trustees will ask you a series of questions about your finances and your papers.
You and your attorney must attend a confirmation hearing in a court. The court will ask your creditors to table all objections at this stage.
- Complete your financial management class
It is necessary to complete a debtor education class before you end the Chapter 13 bankruptcy case. This class is not the same with a credit counseling course you took in step 1.
- Get your discharge.
The court will grant you a discharge when your repayment period ends.
Pros and cons of Chapter 13 bankruptcy
- Your assets are not at risk of being sold.
- You don’t require an income test to apply for this type of bankruptcy.
- Legal protection against creditors
- Property protection against creditors
- No taxes on unpaid debt
- It remains on your credit record for seven years after approval.
- High damage to credit report
- High damage to credit score
- Possible low availability to credit after filing
- Low payment flexibility meaning you are locked into a payment plan
- Length of time 3-5 years
- On public record
Types of Bankruptcy Conclusion:
There are many types of bankruptcy, but the ones that are most common are the Chapter 7 and Chapter 13 bankruptcy, which we provided more information on. Please feel free to add your questions below.