Bankruptcy provides a solution by giving people saddled with substantial debt the opportunity to get out from under it while treating creditors in a fair manner. Once complete, a debtor (the person filing for bankruptcy) will often describe the relief that comes with a clean financial plate as a “fresh start.” They get to start over without the looming burden of unpaid bills.
Even though the general goal of bankruptcy is to clear debt, not all bankruptcies are created equal. In fact, there are six different types of bankruptcies:
• Chapter 7: Liquidation
• Chapter 13: Repayment Plan
• Chapter 11: Large Reorganization
• Chapter 12: Family Farmers
• Chapter 15: Used in Foreign Cases
• Chapter 9: Municipalities
You may have just taken one look at this list and zoned out for second. That’s okay. More than likely, you would only be dealing with the two most common types of bankruptcies for individuals: Chapter 7 and Chapter 13. (A chapter just refers to the specific section of the Utah, U.S Bankruptcy Code where the law is found).
Chapter 7 Bankruptcy
Also known as liquidation or straight bankruptcy, Chapter 7 is the most common type of bankruptcy for individuals. A court-appointed trustee oversees the liquidation (sale) of your assets (anything you own that has value) to pay off your creditors (the people you owe money to). Any remaining unsecured debt (like credit cards or medical bills) is typically erased. But as we mentioned earlier, this doesn’t include the types of debt that aren’t forgiven through bankruptcy, such as student loans and taxes.
Now, depending on which state you live in, there are some things that the court won’t force you to sell. For example, most people are able to hold on to basic necessities like their house, car and retirement accounts during Chapter 7 bankruptcy, but nothing is guaranteed. Chapter 7 also can’t stop a foreclosure, it can only postpone it. The only way to keep the stuff you still owe money on is to reaffirm the debt, which means you recommit to the loan agreement and continue making payments. But most Chapter 7 bankruptcies are no-asset cases, which mean there’s no property with enough value to sell.
You can only file for Chapter 7 bankruptcy if the court decides you don’t make enough money to pay back your debt. This decision is based on the means test, which compares your income to the state average and looks at your finances to see if you have the disposable income to pay back a decent amount of what you owe to creditors. If your income is too low to do so, then you may qualify for Chapter 7. Keep in mind that if you file for Chapter 7 bankruptcy, you will have to attend a meeting of the creditors where people you owe money to can ask you all kinds of questions about your debt and your finances. Yeah, that’s about as fun as it sounds. A Chapter 7 bankruptcy also stays on your credit report for 10 years, and you won’t be able to file for it again until after eight years.
Chapter 13 Bankruptcy
While Chapter 7 bankruptcy often forgives your debt, Chapter 13 bankruptcy basically reorganizes it. The court approves a monthly payment plan so you can pay back a portion of your unsecured debt and all of your secured debt over a period of three to five years. The monthly payment amounts depend on your income and the amount of debt you have. But the court also gets to put you on a strict budget and check all your spending (ouch!).
Unlike Chapter 7, this kind of bankruptcy allows you to keep your assets and catch up on any debt that isn’t bankruptable. Chapter 13 can also stop a foreclosure by giving you time to bring your mortgage up to date. Anyone can file for Chapter 13 bankruptcy as long as their unsecured debt is less than $419,275, and their secured debt is less than $1,257,850.3 Plus, you have to be up to date on any tax filings. You should also know that a Chapter 13 bankruptcy stays on your credit report for seven years, and you can’t file for it again until after two years.
Chapter 11 Bankruptcy
For the most part, Chapter 11 bankruptcy is used to reorganize a business or corporation. Businesses come up with a plan for how they’ll continue operating the company while paying off their debt, and both the court and the creditors must approve this plan. Some individuals, such as real estate investors, who have too much debt to qualify for Chapter 13, but who also have a lot of high-value properties and assets, may also choose to file under Chapter 11. But unless you’re a pro athlete or a celebrity, you’re probably not going to mess with this one.
Chapter 12 Bankruptcy
This is a repayment plan that allows family farmers and fisherman to avoid having to sell all their stuff or foreclose on their property. While it’s similar to Chapter 13 bankruptcy, Chapter 12 is a little more flexible and has higher debt limits.
Chapter 15 Bankruptcy
Chapter 15 deals with international bankruptcy issues and gives foreign debtors access to Utah bankruptcy courts.
Chapter 9 Bankruptcy
Chapter 9 bankruptcy is another repayment plan that allows towns, cities, school districts, etc. to reorganize and pay back what they owe.
The biggest difference between Chapter 7 and Chapter 13 bankruptcy comes down to the person’s assets and income level. For instance, if someone had a recent job loss or an unsteady income, they might fall into a Chapter 7 bankruptcy. But if the means test says they make enough money to pay back their debts, they would fall into a Chapter 13 instead. Someone might also apply for Chapter 13 if avoiding home foreclosure is a top priority, or they could go for Chapter 7 if timing is an issue since it’s significantly faster than Chapter 13.
But bankruptcy is a nerve-wracking experience, and choosing between Chapter 7 and Chapter 13 is like trying to pick the lesser of two evils. In both cases, privacy goes out the window. All your information literally gets laid out on a table for the court to look through. Then there’s the fact that about half of Chapter 13 bankruptcy cases nationwide are dismissed because the debtor can’t make the monthly payments. And while creditors are not legally able to hound you for money while you go through the bankruptcy process, the court will come after you harder than any credit card company can if you miss a payment in Chapter 13. But if your case is dismissed, then creditors have the ability to take their cut directly from your paycheck and your home might go into foreclosure.
Bankruptcy may seem like a magic wand that can make all your problems disappear. But it’s far from a magical experience and it takes a huge emotional toll.
Alternatives to Filing for Bankruptcy
No matter how deep in debt you are, it is possible to avoid bankruptcy. You just need to know your options. Here are a few steps you can take that will help get you out of debt without filing for bankruptcy:
Take Care Of Necessities First.
Before you do anything, you want to make sure the Four Walls are covered: food, utilities, shelter, and transportation. You won’t have the energy to fight your way out of debt if you don’t have a house to sleep in or food to eat. So make sure you’re taking care of yourself and your family first. The collectors can wait.
Get On A Budget.
In Chapter 13 bankruptcy, the court puts you on a budget and tracks your spending. But the truth is, you can do those things without filing for bankruptcy. If you’re on your last leg, making a budget can be a total game changer. By tracking where your money is going instead of wondering where it went, you’ll find money you didn’t even realize you had. And yeah, budgeting also means cutting all unnecessary expenses to pay off debt. The cable and the subscriptions have to go. No more dining out. No more vacations. You’re in survival mode. But instead of the government telling you how to manage your money for five years in a bankruptcy case, you get to be the one calling the shots.
Boost Your Income.
Your income is your most powerful wealth-building (and debt-fighting) tool. The more money you make, the more you can throw at your debt. So, you may need to pick up a second job or work more hours at your current job to help keep you afloat while you catch up on those monthly payments. Yes, it can be exhausting, but your temporary sacrifice will be worth it in the long run.
Sell Your Stuff.
Remember how we said the court liquidates your assets in Chapter 7 bankruptcy? What if you sold your stuff instead? If you’ve got anything of value, like boats, fancy lawn mowers, or anything with a motor that you don’t use to drive to work, sell it! Furniture, collectibles, jewelry, that guitar you promised to learn to play someday—anything you don’t need has got to go. Sound extreme? This is basically what could happen if you file for bankruptcy except you wouldn’t have control over how your things get sold. So hit up Craigslist, eBay and Facebook Marketplace and turn your stuff into fast cash.
Filing for bankruptcy is never an easy decision, and you’ll have to weigh the pros and cons of the long-term effects on your debt and credit. But in general, bankruptcy may be the best option if:
• You see no way to pay off your debts within five years.
• Your amount of debt (excluding a mortgage) is greater than 40% of your income.
• You’re paying as much as you can toward your debts but not making progress.
• Debt payments are preventing you from meeting other financial goals, such as saving for retirement.
If you’re considering bankruptcy, get free consultations from a bankruptcy attorney and a nonprofit credit counselor to better understand your financial situation and whether bankruptcy is the best option.
Do You Need A Bankruptcy Attorney?
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. Many bankruptcy attorneys will want payment before filing, but you have options to help pay for bankruptcy. Filing for bankruptcy is the single most damaging action you can do to your credit, since it will stay on your credit report for up to 10 years.
Advantages of Chapter 7 Bankruptcy
Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here’s how it works:
• It’s relatively quick; A typical Chapter 7 bankruptcy case takes three to six months to complete.
• No payment plan: Unlike Chapter 13 bankruptcy, a filer doesn’t pay into a three- to five-year repayment plan.
• Many, but not all debts get wiped out. The person filing emerges debt-free except for particular types of debts, such as student loans, recent taxes, and unpaid child support.
• You can protect property. Although you can lose property in Chapter 7 bankruptcy, many filers can keep everything that they own. Bankruptcy lets you keep most necessities, and, if you don’t have much in the way of luxury goods, the chances are that you’ll be able to exempt (protect) all or most of your property.
• You can keep a house or car in some situations. You can also keep your house or car as long as you’re current on the payments, can continue making payments after the bankruptcy case, and can exempt the amount of equity you have in the property.
Who Should File for Chapter 7 Bankruptcy?
Chapter 7 works very well for many people, especially those who:
• own little property
• have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy), and
• whose family income doesn’t exceed the state median for the same family size.
You’ll take the means test to see if your income qualifies for this chapter. If your income is below the average income for a family of the same size in your state, you’ll automatically qualify. If your income is higher than the median, you’ll have another opportunity to pass. However, if after subtracting allowed expenses, including payments for child support, tax debts, secured debts (such as a mortgage or car loan), you have income left over to make a significant payment to your creditors (called disposable income), you won’t qualify to file for Chapter 7 bankruptcy.
When Chapter 13 Might Meet Your Needs
Chapter 7 bankruptcy isn’t the best choice for everyone. Chapter 7 won’t help people whose debts won’t get wiped out (discharged), like certain income tax debt, student loans, and domestic support obligations. High-income filers find it hard to qualify. It’s also not a good fit for people who would lose substantial equity in a home or other property if they filed for Chapter 7 bankruptcy, or those facing foreclosure or repossession. For those individuals, Chapter 13 bankruptcy would likely be a better choice.
Drawbacks of Chapter 13 Bankruptcy
Most people prefer Chapter 7 bankruptcy because, unlike Chapter 13 bankruptcy, it doesn’t require you to repay a portion of your debt to creditors. In Chapter 13 bankruptcy, you must pay all of your disposable income—the amount remaining after allowed monthly expenses—to your creditors for three to five years.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506