Bankruptcy is one of the most misunderstood areas of the law. Bankruptcy is a legal process designed to help individuals and companies get a financial fresh start by discarding or making arrangements to repay unmanageable debt. It can also be a way for companies to end business and liquidate assets in an orderly way.
There are times when the mountain of debt becomes too difficult to climb. Bankruptcy offers a way out of this situation while still considering the creditors seeking to collect debts.
What are the types of bankruptcy?
The two most common kinds of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 11 bankruptcy is typically used by businesses.
Chapter 7 bankruptcy
Known as “liquidation” since most unsecured debts are forgiven, Chapter 7 bankruptcy is the fastest and most common form of bankruptcy.
Best for: Consumers who have primarily unsecured debt, such as medical bills, credit card debt or personal loans. You must pass the means test, which determines whether you qualify to file Chapter 7. You cannot have had a Chapter 7 discharge in the past eight years or a Chapter 13 discharge in the past six years.
Chapter 13 bankruptcy
Known as a “wage earners” bankruptcy, Chapter 13 bankruptcy restructures debts into a payment plan over three to five years.
Best for: Those who have assets they want to retain, like expensive jewelry, or secured debts they want to get current on, like a mortgage.
You must have regular income and you must be current on tax filings. You cannot have filed for Chapter 13 in the past two years or Chapter 7 in the past four years.
Do you need a bankruptcy attorney? The short answer: Yes.
Bankruptcy is a long and complicated process. One form improperly filled out could result in the dismissal of your case, which means you would have to wait six months to file again. Find a bankruptcy attorney to help you navigate the process and ensure your paperwork is properly filled out.
A word of caution if you’re thinking of filing without an attorney: Bankruptcy data shows that only 1.4% of Chapter 13 bankruptcy cases filed without an attorney in 2012 received a discharge, meaning the cases were closed and the eligible debts were forgiven, according to the Federal Judicial Center.