Filing a petition for bankruptcy means a declaration of one’s inability to pay back loans or debts. You may even consider this as a plea to the court for legal assistance as well as protection from bankruptcy. There are a lot of things involved in a bankruptcy such as your income, debt, value of your ‘assets,’ and many more. But the most important thing you have to know is the different forms of bankruptcy used in a variety of situations. These forms of bankruptcy are often referred to as “chapters”, based from the chapters found in statutes of the bankruptcy law. The most common are chapters 7, 11, 12, and 13.
A lot of cases, people file for chapters 7 and 11 only. In oftentimes, people tend to get confused from the difference between the two chapters. Some say that it is much better to file for a chapter 7 while others prefer chapter 11. If you are filing a bankruptcy and you do not know which chapter to choose, then here are some important information you should take note of.
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy is a ‘liquidation’ bankruptcy, commonly known as the “Straight Bankruptcy”. Under this chapter, a person’s assets over a certain amount are sold and can be used as a medium in order to pay back creditors. The advantage of this chapter is that the debtors come out with no future obligations on the discharged debts. The disadvantage of this, however, is that you might lose a lot of your possessions. But in exchange, you will be able to cancel your debt entirely, or in some cases, a large portion of them.
Most people file this chapter in order to get a new start and possibly rebuild responsible credit. Filing a chapter 7 means you want to be set free from personal liability for the discharged debt. But keep in mind that this does not discharge you from student loans, unless the court decides to do so, child support and alimony, taxes, as well as debts incurred by fraud.
Bankruptcy on Chapter 7 does not ‘wipe’ out mortgages or liens completely. If a debtor likes to keep a particular item, which for example is a car or house, the payments must be continued. If the debtor likes to discharge a car loan, then the car must be surrendered to the creditor who holds the lien.
What is Chapter 11 Bankruptcy?
Chapter 11, also known as “re-organization” bankruptcy, is a popular form of bankruptcy for large businesses that are keen in restructuring their debt. It is available to individuals and partnership where the debtor remains in control of assets and operates. However, they are supervised by the court for the advantage of the creditors.
If in case the debtor is incompetent or deemed dishonest, a trustee will be appointed by the court in order to satisfy unsecured creditors. The appointment of a trustee is considered as a remedy but within the discretion of the bankruptcy judge. The trustee is given the job to check for the debtor’s operations and serves as a person to negotiate with for a suitable plan of reorganization.
Chapter 11 is one of the most flexible forms of bankruptcy compared to other chapters but it’s the most difficult to generalize about. Filing for a chapter 11, in general, is a lot more expensive to the debtor since there are a lot of fees involved, and the rate of a successful reorganization is quite slim, estimated about 10 percent or less.
What is the best chapter in filing bankruptcy?
The chapter you must file for bankruptcy will depend on your situation. For some people, chapter 7 is the most ideal chapter in filing bankruptcy since it cancels most debts by liquidating assets for payment. A typical chapter 7 also opens and closes within 3 to 6 months. After that, the person filing will emerge debt-free, particularly for mortgage, car payments, unpaid child support and even more. But of course, the downside is that you will lose your properties.
In some cases, chapter 11 may be more advantageous than filing for chapter 7. The reason for this is that under chapter 11, managers have the option to negotiate with the creditors in order to come up with the best solution from bankruptcy. This includes coming into terms whether the business can liquidize some, or all of its assets, or re-organize, in order to save the firm and pay back the creditors at the same time. This is advantageous if there is something wrong with the company internally, thus making it unable to meet all the payments to creditors. If this is the case, most businesses can come out from bankruptcy and re-emerge as a healthy organization.
Chapter 11 can be filed, not only by large companies but by certain individuals and small business owners as well. It allows debtors to restructure their debts and pay them back on a specified date. This chapter is very useful for individuals who are not qualified for Chapter 13 Bankruptcy, which is more complex. On one hand, chapter 7 can be filed, only by meeting required criteria. If in case the debtor doesn’t meet the requirements, a ‘bankruptcy’ court can change the case to chapter 13. Some areas where chapter 7 is not granted include having very high income, can repay debt, debt was ‘previously’ discharged, and bankruptcy case was already dismissed by the court.
Personal assets are not at risk under chapter 11 compared to chapter 7 where some assets are liquidized in order to pay off debt. A corporation or business is separate from its owner so only the assets of the stockholders are at risk. However, under chapter 11, the court or creditor may request for a trustee who will serve as a watchman regarding the business’ operations as well as reports.
When choosing between chapter 7 and chapter 11, you have to know more about the basics. See the difference between the chapters of bankruptcy before you move ahead. Ideally, you should speak with a bankruptcy attorney who can guide you through the process, set the best course of action, as well as give the most successful outcome. You can also get tips for non-bankruptcy from them, thus helping you avoid filing bankruptcy at all.