Each year, some 800,000 individuals and businesses file for bankruptcy. It’s a drastic yet valuable option if you’re facing a growing amount of debt that you cannot repay. Whether you have unpaid medical bills, large credit card balances or foreclosure notices, here’s what you should know about the different types of bankruptcy.
Different Types of Bankruptcy
- Chapter 7 bankruptcy wipes out unsecured debts. Unless you have valuable assets, repayment isn’t required.
- Chapter 13 bankruptcy addresses most secured and unsecured debts if you repay them partially or in full.
- Chapter 11 bankruptcies temporarily protect businesses and high net-worth individuals while they restructure their finances.
- Chapter 12 bankruptcy shields farmers and fishing operators from collections and repossessions when they arrange partial or full repayment.
Bankruptcy Alternatives and Debt Relief
Medical bills, job loss, divorce, separation and consumer debt are the leading causes of personal bankruptcy. Unexpected expenses have lasting financial consequences. With the increasing cost of living, it is difficult to support a family without relying on high-interest loans and credit cards. Americans owe a recording-breaking amount to credit card companies, banks and lenders. Mounting debt can quickly become an uncomfortable burden. That’s when bankruptcy can help.
Bankruptcy may be a last resort for severe financial problems, so it’s important to examine alternatives. Debt consolidation and debt settlement may offer similar advantages in a shorter amount of time. In fact, you might be required to undergo credit counseling before you file for bankruptcy. If your creditors are threatening to take your car or repossess your house, bankruptcy can protect you while you get back on track. The right option often depends on the type of debt you owe.
Chapter 7 Bankruptcy
This is the most common type of bankruptcy. It’s also called a straight bankruptcy or liquidation bankruptcy because your unsecured debts are discharged at the end of your case. If you own nonexempt assets, the trustee may liquidate these possessions and give the proceeds to your creditors.
Median Income Limits Under the Means Test
To qualify for this type of bankruptcy, you have to pass a means test. Chapter 7 liquidation bankruptcy isn’t available to high-income individuals. You must earn less than similarly sized households in your community.
Currently, the median income in Wisconsin is $48,407 for a single person, $62,914 for a two-person family, $76,179 for three people, and $89,245 for a four-person household. The average for North Carolina is $50,797 and Illinois is $60,413. For each additional person, the ceiling increases by $8,400. The government periodically adjusts these income limits. Plus, deductions are available for many essential expenses, including groceries, rent, mortgage payments, utility bills, and transportation.
Benefits and Drawbacks of Chapter 7 Bankruptcies
- Your unsecured debts will be discharged in just three to six months.
- The Trustee may try to liquidate your nonexempt assets.
- Liquidation bankruptcies may stay on your credit report for 7 years or longer.
Chapter 13 Bankruptcy Repayment Plans
Chapter 13 of the bankruptcy code allows wage earners to discharge some or all of their debts by completing a three- to a five-year repayment plan. The length of the schedule depends on your income. If you earn less than the median in your state, the bankruptcy will last three years. If you earn more than similar households, the court can set a five-year term.
Compared to Chapter 7, the process is longer. The advantage is that you can keep your property. The wage earner’s bankruptcy stops the foreclosure process if you’re behind on your mortgage payments. You’ll also be able to keep your home and catch up on the late payments gradually.
Pros and Cons of Chapter 13 Bankruptcies
• You’re protected from collections for the duration of the repayment period.
• You have a chance to avoid foreclosure and keep your home.
• Chapter 13 addresses secured and unsecured debts.
• You must repay all of your priority debts and you may pay part of your nonpriority debts.
Chapter 11 Bankruptcy for Businesses
Chapter 11 of the bankruptcy code states that businesses and individuals can protect their property and assets by restructuring their finances. This type of bankruptcy is costly and time-consuming. It’s used by businesses and individuals who have too much debt or income.
You can file the bankruptcy petition voluntarily, or your creditors can file it on your behalf. After submitting the petition, the lenders must agree to your repayment strategy. Creditors might lower your interest rate or temporarily reduce or suspend your payments until your finances improve.
Advantages of Chapter 11 Restructuring
• You control your assets during the bankruptcy.
• Your property won’t be liquidated to repay your creditors.
• The automatic stay temporarily protects you from lawsuits and foreclosures.
• You can continue earning profits through your business or investments.
Chapter 12 Bankruptcy for Family Farmers and Fishermen
If you earn a stable annual income from fishing or farming, you may qualify for Chapter 12 debt relief. The government created this type of bankruptcy in 1986 to protect businesses that are financially vulnerable to severe weather and fluctuating commodity prices.
Discharging Debt Related to Fishing and Farming
If you qualify for this type of bankruptcy, you have to repay some or all of your debts within three to five years. Different debt ceilings apply for farmers and commercial fisherman. Your total debt must be less than $4,153,150 if you operate a farm or less than $1,924,550 if you have a commercial fishing operation.
The majority of your unpaid bills must be related to your business. For farmers, at least half of your debt has to be from your farm. For fishing operators, your personal debt cannot exceed 20 percent of the total.
Benefits and Drawbacks of Chapter 12 Bankruptcies
- The debt ceiling is substantially higher than other bankruptcy options.
- The process is simpler and more affordable than Chapter 11 bankruptcy.
- You must repay all of your secured debts if you have any remaining disposable income.
- At least half of your household’s income must be derived from fishing or farming.
Confidential Bankruptcy Consultations
If you’re ready for a fresh financial start without the burden of debt, contact The Fitzgerald Law Firm at WI: 608-318-3489, IL: (224) 725.FITZ (3489) or NC: (828) 435.FITZ (3489) to schedule a consultation at our offices in Asheville, North Carolina, or Beloit, Wisconsin. We’ll explain the different types of bankruptcy relief, suggest alternatives and recommend the best option for you.
