When someone is struggling financially, bankruptcy may be the best option for them to get out of debt and get their lives and their credit back on track. Bankruptcy generally eliminates or reorganizes your debts to give you a fresh financial start.
Bankruptcy professionals, such as paralegals, attorneys, petition preparers, lawyers and others are often asked "What is the best type of bankruptcy?" There are 5 types, or chapters, of bankruptcy. Each is designed to do something different for different situations. While there isn't necessarily a "best" chapter of bankruptcy overall, there may be a best chapter of bankruptcy for your particular situation. In order to understand the best type of bankruptcy for you, you first must understand the different types of bankruptcies.
Chapter 7 bankruptcy is the most common form of bankruptcy. Chapter 7 is often referred to as a "fresh start bankruptcy," a "total bankruptcy," or a "complete bankruptcy." Many individuals find this type of bankruptcy to fit their situation the best, and it is generally the most simple and successful form of bankruptcy. Chapter 7 bankruptcy may be filed by either an individual or a business (although businesses that file Chapter 7 must go out of business). For individuals, Chapter 7 bankruptcy provides you with a quick resolution to a fresh start. Chapter 7 bankruptcy relies on the theory that the Debtor provides the Court all of their assets (except for exempt assets) in exchange for a discharge (release) from their debts. It is important to know that very few people lose anything in a Chapter 7 bankruptcy.
Chapter 7 bankruptcy generally only lasts 3-4 months and has almost a 100% success rate. Generally, all a debtor has to do is file the appropriate paperwork (professionally prepared by Simplified Document Solutions or a competitor), go to a quick hearing to verify the identity of the person and verify the paperwork, and wait for the discharge.
Chapter 7 does have some limitations. For instance, you must qualify for chapter 7 bankruptcy protection based on your income and expenses. This keeps some people who have incomes in excess of the median income for their state from filing for Chapter 7 bankruptcy protection. Georgia has pretty generous exemptions, but some people with valuable property may decide that bankruptcy is not the best option for them because they risk losing this property. Some debts may also not be discharged. For instance, student loans are not discharged without filing a lawsuit against the government and/or student loan lender, child support, alimony, and property settlements are not dischargeable, and some taxes are not discharged. Also, the Supreme Court recently stopped bankruptcy judges from "stripping" second mortgages and homeowner's association liens from your home.
Chapter 9 bankruptcy is designed for municipalities. It is a reorganization to allow cities, counties, and municipal corporations to shed some of their debt and keep operating. The most notorious example of this was when the City of Detroit filed bankruptcy a few years ago. It eliminated some of their unsecured debt and pensions to permit the city to begin the rebuilding process. Less publicized Chapter 9 filings are school boards and municipal hospitals.
Chapter 11 bankruptcy is a reorganization for businesses and individuals with extremely high debts. This is the third most common form of bankruptcy and it is primarily used for businesses (LLC or Inc.). Individuals who file for Chapter 11 bankruptcy often do so because their debts are in excess of the debt limits for Chapter 13, as such you often hear of celebrities filing for Chapter 11 protection. Chapter 11 bankruptcy is incredibly complex and should not be attempted without the assistance of a very experienced Chapter 11 attorney (not just any bankruptcy attorney will be competent to handle this).
Chapter 12 bankruptcy is for family farmers and fishermen. It is similar to a Chapter 11, although less common. Because people in these occupations often have irregular income and lots of assets, it is more flexible than other forms of bankruptcy for these individuals. In order to qualify for this type of bankruptcy, most of your income must come from farming or commercial fishing. Again, I would not attempt this without a very experienced Chapter 12 attorney.
Chapter 13 bankruptcy is a reorganization for an individual (or married couple). This is often called a "wage earner plan" because it requires regular monthly payments. A chapter 13 bankruptcy is a repayment plan that lasts 3-5 years. Nearly all of your debt is rolled into a Chapter 13 plan and the Debtor is expected to make a payment every month to pay some or all of it off. At the end of the case, most of your debts are discharged.
Chapter 13 bankruptcy does have some major benefits. For instance, homeowner's filing Chapter 13 are still permitted to strip off their second mortgage or homeowner's association liens. If you owe money on a car, it may be possible to reduce the interest rate and stretch out the payments to 5 years. If someone has mortgage arrears, child support arrears, behind on car payments, or owes taxes, a Chapter 13 may permit you to catch up on those payments through the plan. High income individuals are also not excluded from filing Chapter 13, although their income is used in determining the monthly payment and the length of the plan.
Chapter 13 has some downfalls as well. You are expected to pay all of your income in excess of what is reasonably required for the support of yourself and your family for the entire length of the plan, this often means major sacrifices that people are not ready to make. Also, you are not allowed to re-establish your credit until the case is completed. The plan can be especially hard if you lose your job during the case or get ill. Because of this, more chapter 13 cases get dismissed (thrown out) than discharged. Making things even more difficult is the requirement in most cases that a debtor turn over their tax refund in every year of the case. People who get large tax refunds hate this requirement.
Because of the complexity of chapter 13 cases, Simplified Document Solutions often encourages people to seek the assistance of an experienced attorney before doing this. CAUTION: Bankruptcy attorneys make a lot more money on Chapter 13 bankruptcy than they do on Chapter 7; giving them a perverse incentive to suggest them to individuals who do not really need them. You should ask your attorney, "Why are you suggesting a chapter 13?" Ask yourself "Will I be okay with losing my tax refund?" Is it reasonable to believe that I might change jobs or become ill in the next 5 years?" Am I ready to give up eating-out for a full 5 years?" Is this house or this car worth struggling for 5 years?" "Will this car even run in 5 years?" Will I be okay without any new debt for 5 years, why haven't I been okay without incurring debt over the last 5 years, what's changed?" If you are trying to stop repossession or foreclosure of a home or car, it might make since to buy some time with the property by filing chapter 7 and give it up at the end of the Chapter 7. Be aware that your attorney is ultimately in business to make more money and may not have your best interests at heart. It is ultimately you that must protect yourself, nobody else will.
Simplified Document Solutions is a non-attorney bankruptcy petition preparer firm with offices in College Park, Georgia and Conyers, Georgia. We are a congressionally designated debt relief agency. We help people obtain debt relief under the bankruptcy code. We have an "A" rating from the BBB. This article is for general information only and is not intended to be legal advice. If you need legal advice, you must contact a licensed attorney in your state. Please contact Simplified Document Solutions at (678) 490-5841 to schedule an appointment to discuss your bankruptcy matter.
