Which Bankruptcy Chapter is Right for You? Comparing Chapter 13, 11 and 7

If you're in debt, you need answers about your options

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There are three types of bankruptcy open to consumers – but not all are appropriate for every situation – and you may only qualify for one or two. We often have confused clients come in for their initial free consultation that tell us “I think I want to file for bankruptcy” but they don't understand that there are different types and that each has its unique advantages and limitations. Here's a look at Chapter 7, 13 and 11 and what each can do for you.

Chapter 7

This is known as a straight bankruptcy and will liquidate most of your debts if you qualify. The big pro of a Chapter 7 is that you can get more of a fresh start than with the other two bankruptcy chapters. You have to pass a bankruptcy means test to see if you qualify. Essentially, if your income (no matter how high) does not allow you to service your debt load, you should qualify.

Unsecured debts are wiped out including credit cards, personal loans, old homeowner's association dues/fees, medical bills and the like. Mortgages and car loans will not be wiped out. However, if you surrender your home or car as part of your Chapter 7, any remaining debt resulting from the difference between your loan balance and the value of the asset that your lender repossesses will be discharged.

Old tax debts may be eligible for discharge if the tax returns were filed on time but there are still balances lingering. Student loans may be decreased or discharged in case of extreme financial hardship, permanent disability, terminal illness or other permanent financial crisis – but you have to file a separate action called an adversary proceeding where you basically sue the student loan servicer for relief.

What can Chapter 13 bankruptcy do for you?

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Chapter 13

This is known as a wage earner plan and will allow you to chip away at your debt through a repayment plan to reorganize your debts. Usually with a chapter 13, some of your unsecured debts will end up being discharged at the end of your plan. Payment plans last three to five years and depend on your income and debts. Secured debts are prioritized such as mortgage and auto loans.

Your attorney develops a payment plan to service your debts and the Trustee in your case (a lawyer and representative of the court) will either approve the plan or recommend alterations. You pay in a monthly amount to your Trustee who then distributes amounts out to your creditors. Usually your attorney fees are part of the payment plan because most debtors can't pay this cost up front.

At the end of the repayment plan, any remaining unsecured debts such as credit card or medical bills that weren't paid in full during your plan will be discharged. Your mortgage and car loan will continue on after the repayment plan ends if there are still balances owed. Most anyone can qualify for a Chapter 13 that is struggling to make their payments unlike a Chapter 7.

Chapter 11

This is mainly used for businesses to get debts under control so they can stay afloat but it takes longer to play out and costs much more, so isn't an alternative for many small business owners or individuals. Almost anyone can file chapter 11 if they can afford it. There are no limits on your earnings or your debt to income ratio.

One of the differences is that chapter 11 cases are not managed by a Trustee like in a chapter 13. This plan is usually opted for by those with debts too excessive to be eligible for chapter 13. If you have more than $336,900 in unsecured debts and more than $1,010,650 of secured debt, you can't file chapter 13. This is why you often hear about celebrities filing chapter 11 rather than chapter 13 bankruptcy when they get in over their heads with debt.

Which Chapter Is Right for You?

Every debt situation is unique. We advise anyone in North Carolina dealing with overwhelming debts to call us for a free consultation. We have several convenient locations to choose from. Bring in copies of your bills and a payroll stub and we'll take a look at what you're dealing with and let you know which options you qualify for, which will likely benefit you most and then get you started on the road to debt relief so you can enjoy a financial fresh start free of the stress of unmanageable debt.