If you find yourself in a mountain of debt that you just cannot dig out of, you might consider looking into bankruptcy. Before you do make the decision however, there are some important things you need to understand.
For example, when you declare bankruptcy, your credit score will tank and you will have a hard time obtaining credit, like an auto loan, credit card, or mortgage, for a long time. And when you do get to the point of being approved, your interest rate is going to be sky high. The bottom line is, life will be hard after bankruptcy.
But there is something else important to consider. What type of bankruptcy you are going to file for? Yes, there are different forms of bankruptcy and choosing the right one is critical.
In this post, I’ll walk you through the differences between Chapter 7 and Chapter 11 bankruptcy so you can get a better idea of which one is best suited for your personal situation.
Differences Between Chapter 7 And Chapter 11 Bankruptcy
What Is Chapter 7 Bankruptcy?
Now that you know there are differences between Chapter 7 and Chapter 11 bankruptcy, let’s first understand what Chapter 7 bankruptcy is all about.
Chapter 7 bankruptcy is the most popular option and it is the most straight forward option. In this case, all of your assets are liquidated and the money you get from selling everything goes back to the lenders to pay off your debts.
Any debt that is still outstanding is discharged. But while this is the most popular option, you have to qualify for it. To do so, you need to have your monthly income be less than the median income for your state, based on your household size.
What if your income exceeds the median income for your state and household size? You can still qualify for Chapter 7 bankruptcy, but you have to pass a means test. With this test, the court determines if you earn enough money to make payments to your creditors.
If you do, your case gets dismissed and your bankruptcy is converted over to Chapter 11 or Chapter 13.
What About Chapter 13 Bankruptcy?
You may be wondering what Chapter 13 bankruptcy is, since I didn’t mention it at the start of this post. The reason is because both Chapter 11 and Chapter 13 are very similar.
Here is how Chapter 13 bankruptcy works. You have enough income to repay your debts. The court sets up a repayment plan that has you make reduced payments on your unsecured debt, think credit cards, personal loans, etc.
You make these payments for 3-5 years and any remaining debt after this point is discharged. If you have other secured debts, like a home or car, you will continue to make regular payments. If you cannot afford these payments, you can try to add a cramdown provision.
This will have the debt on these assets reduced to their fair market value and you will make payments based on this lower value.
What Is Chapter 11 Bankruptcy?
You enter into Chapter 11 bankruptcy when your debts exceed the limitations of Chapter 13 bankruptcy. In other words, you have so much debt that even repaying a reduced payment for 3-5 years on unsecured debt and adding a cramdown provision don’t help much.
Overall however, Chapter 11 bankruptcy works much like Chapter 13. The major difference is the repayment plan. Since you have so much debt, your creditors are more concerned about getting a good portion of their money back.
As a result, they fight for the largest monthly amount in repayments. And since they are all fighting for the most money, the process of bankruptcy can get ugly and drawn out. When this happens, the fees you are paying your bankruptcy attorney are going to skyrocket.
As a result, you want to avoid Chapter 11 bankruptcy at all costs.
Why Choose One Over The Other?
Now that you know the major differences between Chapter 7 and Chapter 11 bankruptcy, which one should you choose? At the end of the day, it is up to the court to decide which bankruptcy chapter you end up getting approved for.
For many people, Chapter 13 is ideal simply because you don’t have to liquidate all of your assets. But by hiring a skilled bankruptcy attorney, they can help you make the best decision based on your personal circumstances.
Those are the major differences between Chapter 7 and Chapter 11 bankruptcy. Before you decide to file for bankruptcy, I urge you to try everything possible to avoid it. This means cutting back on your expenses, finding a second job to add more income, or even personally call up your creditors and try to work something out with them.
While these options don’t sound very exciting, it is a lot smaller of a headache to do this than to go through with a bankruptcy filing and then dealing with your destroyed credit afterwards.