It’s important to know the types of bankruptcies when you are doing research as the goal of each is to receive debt relief through discharging debts. One type of bankruptcy may be more expensive, but you can save property. In another type of bankruptcy, the discharge may be 3 or 5 years vs. 90 days.
The purpose of this article is to explain the types of bankruptcies, discuss the process, and pros and cons while providing information and insight to help you make the most informed decision.
What are the Different Types of Bankruptcies?
Although the goal of all bankruptcies is to reduce or eliminate the debt of those who do not have the means to repay fully, not all bankruptcies apply to all. There are 5 different types of bankruptcies:
- Chapter 7: For Liquidation (most common consumer bankruptcy)
- Chapter 13: Repayment Plan (Second most common consumer bankruptcy)
- Chapter 11: Large Reorganization
- Chapter 12: For Family Farmers
- Chapter 15: For Foreign Cases
We will spend the most time discussing Chapter 7 and Chapter 13 Bankruptcy because those are the most common to the consumer. Here are some dedicated resources to the other types of bankruptcy if you are interested: Chapter 11 bankruptcy, Chapter 11 Subchapter 5, Chapter 12 bankruptcy, Chapter 15 bankruptcy.
Understand The Chapter 7 Type of Bankruptcy:
Many people prefer Chapter 7 bankruptcy because the bankruptcy attorney fees are less expensive (often completed through a payment plan), you can receive a discharge of most of your unsecured debt within 90 days, and you can feel back on your feet again rather quickly.
The reason many people do not file for Chapter 7 bankruptcy is because:
- They do not qualify for Chapter 7 bankruptcy.
- They own too much equity in a house, above the state’s homestead exemption. What does that mean? Let’s say you owe $200,000 on your home and the home is worth $400,000. Let’s say your state lets you exempt $50,000. Essentially, you are $150,000 above the exemption, so you may be at risk of losing the home if you choose Chapter 7 bankruptcy. There are many ways to keep your house in bankruptcy, but it’s important to understand the general process.
Chapter 7 Bankruptcy Qualification
Let’s go into Chapter 7 bankruptcy qualification. The Chapter 7 bankruptcy qualification is based on means testing, Simply put, the bankruptcy means test is trying to answer the question, “do you have the “means” (ability) to pay back some of your debt or should it all get forgiven?”
To answer this, the initial calculation takes into consideration your household size, where you live and how much you make. It does get more complicated when you have a spouse, and if you make more than the states means test.
As such, we had many people asking about whether they qualify, so we built the following bankruptcy means test calculator that considers your states’ data to help you estimate qualification.
As you are probably early in your review, I would consider choosing to compare all of your options and select analyst review (screenshot below). This indicates that you’d like to understand ALL of the different debt relief options and it also indicates that you’d like someone to do a free review of your data.
Chapter 7 Bankruptcy Cost
There are two primary costs to file Chapter 7 bankruptcy:
- Chapter 7 Filing Fee Cost of $335
- Bankruptcy Attorney Fees that Vary By State and Location
The important things to understand is that while there are cheap ways to file bankruptcy, you should be careful which you choose. You may want to be careful about any company that promises extremely cheap filing or services that state that they will file for free.
Chapter 7 Bankruptcy Process
Now that you estimated your Chapter 7 qualification and potentially estimated a cost, it’s important to understand the Chapter 7 bankruptcy process. Believe is 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 ready to file.
1. 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 at the time of filing for bankruptcy, or after your case.
2. Determine your exempted properties
Futhermore, every state has laws that restrict the type of property that you are allowed to keep if you file for chapter 7 bankruptcy.
3. Check if you’re eligible
You may have to take and pass the bankruptcy means test before you can qualify for a discharge.
4. 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).
5. 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.
6. 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.
7. Submit your document to a bankruptcy trustee.
For example, 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.
8. 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.
9. 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 now know about qualification, cost and the process. Let’s spend a few minutes going through the 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.
- It may 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.
- Your bankruptcy will be public record.
Understand the Chapter 13 Type of Bankruptcy
Many people do not qualify for Chapter 7 type of bankruptcy, but you may qualify for Chapter 13 type of bankruptcy as long as your Chapter 13 debt amounts are below the limit. Below are the debt limits for Chapter 13 cases filed on or after April 1, 2019, are:
- $419,275 for liquidated, noncontingent unsecured debts
- $1,257,850 for liquidated, noncontingent secured debts
These debt limits are scheduled for revision on April 1, 2022.
Chapter 13 Plan Payment
A Chapter 13 bankruptcy is often a 3 or 5 year payment plan where you are required to pay your disposable income to the trustee. Your disposable income can help pay back some of your unsecured creditors before discharge.
As such, if you do not qualify for Chapter 7 or do not wish to pursue a Chapter 7, you should try to understand an estimate of your Chapter 13 plan payment. You can estimate your Chapter 13 plan payment by using the following bankruptcy form, “Chapter 13 Calculation of Your Disposable Income“. The form is complex, so we also build a Chapter 13 calculator you can take below to estimate your Chapter 13 plan payment that mirrors the bankruptcy form.
Chapter 13 Bankruptcy Process
Here’s an overview to filing for Chapter 13 bankruptcy.
1. Take and complete a credit counseling course
2. Prepare the proposed Chapter 13 plan and fill necessary forms
Complete the required schedules, bankruptcy petition, and other relevant forms. You must also disclose all your debts, property transfers, income, property and more. In addition, you will need 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 proof that you have filed tax returns in the last four years.
3. 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 will also collect payments and distribute them to creditors, monitor your expense report and monthly income. In addition, he trustee will inform your creditors that you’ve filed for bankruptcy; this will stop most of your creditors from proceeding with collection actions.
4. Make payments in accordance with your repayment plan.
You must begin your repayment plan a month after filing your papers even if the court has yet to approve your repayment.
5. 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 trustee will ask you a series of questions about your finances and prepared documents.
In addition, 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.
6. Complete your financial management class
Complete a debtor education class before you end the Chapter 13 bankruptcy case. Note that this is not the same as the credit counseling course you took in step 1.
7. Get your discharge.
The court will grant you a discharge when your repayment period ends.
Pros and cons of Chapter 13 bankruptcy
Chapter 13 Bankruptcy Pros:
- 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
Chapter 13 Bankruptcy Cons:
- 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
Should I do Chapter 7 or Chapter 13?
An important question you may ask yourself is whether you should file for Chapter 7 or Chapter 13 bankruptcy. Another question is whether to do an alternative to bankruptcy. Both types of bankruptcies have different costs and both have pros and cons.
You may quantify the pros and cons for your specific situation and take the bankruptcy calculator below to help compare Chapter 7 and Chapter 13 and understand the cost estimates for both options. You may also want to get a free consultation with an attorney to go through the options.