Chapter 7 vs Chapter 13 vs Chapter 12 vs Chapter 11
What Is the Difference Between Chapter 13, Chapter 7, Chapter 12 and Chapter 11 Bankruptcy?
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is purposed to bring debt relief to individuals, whose income and amount of debt does not allow them to pay loans back now or in the future (hopeless debt).
The person with an unbearable burden of debts has a right to file for bankruptcy if he/she matches several key criteria. Chapter 7 (also called liquidation bankruptcy) has number of advantages that makes this chapter the most popular in the USA. The process of filing for bankruptcy under this chapter is very fast (comparing to other chapters) and lasts about 3-6 months.
Bankruptcy under Chapter 7 allows a person keep a lot of their possessions without having a need to sell it forcibly. Like every other chapter, Chapter 7 implies debt relief for only non-secured loans. If you have secured loan which becomes unbearable, you may just give up your collateral (a house, a car, or anything which were used to secure the loan) and you are free from this particular debt.
Let’s take a closer look at key aspects of filing for bankruptcy under the Chapter 7.
Chapter 7 Eligibility
It’s easy to find out whether you are eligible for Chapter 7. First of all, Chapter 7 is available only for individuals, and not for companies or partnerships. There is a special test called Means test that you have to pass successfully.
The Means test includes calculations of your median income. If, after passing the test, it will turn out that your income is enough to pay at least a certain part of your debt, you are not eligible for Chapter 7. Instead, you will be offered to file for Chapter 13.
If you have had a debt relief previously under the Chapter 7, you are not allowed to file for liquidation bankruptcy earlier than 8 (or 6) years after the last bankruptcy. If you will decide to file for Chapter 13 after the previous debt discharge under the Chapter 7, you will have to wait for 6 years after the last bankruptcy.
Who does not qualify for Chapter 7?
You are not allowed to file for this chapter if you have already filed for it and received approval and the period between your previous debt discharge and current moment is less than 8 years.
You will also not qualify if the judge will find out (or even suspect) you are lying to your creditors concerning your income.
You will not qualify if you have received a bankruptcy refusal during the last 6 months. The things will go worse if your bankruptcy was dismissed due to the previous fraudulent filing.
You will definitely get a refusal if they will discover you have tried to hide some of your assets from listing in bankruptcy papers. If it will be found out that you have tried (successfully or unsuccessfully) to unload your valuable assets to your relatives or a spouse with the purpose to save assets from withdrawal by the bankruptcy court, you will face really serious consequences.
You will not qualify is your debt ceiling exceeds requirements and your regular median income is enough to file for Chapter 13.
Benefits and flaws of filing for Chapter 7 Pros and Cons
Chapter 7 is the easiest to file for and the fastest in terms of the time the whole process will take. Here are the main pros and cons of Chapter 7.
Chapter 7 allows strict and immediate debts liquidation without long and stressful process.
The court order about your bankrupt status will instantly stop all actions on the side of collectors.
The record about your bankruptcy will stay in public documents only for 6 years.
You will be cleared of your financial obligations without a need to make debt reorganization plan.
You will be allowed to keep your exempt property like furniture, an inexpensive car, clothing, and other necessities.
Despite your credit score is too low to get a bank loan after the bankruptcy, you will still be able to find online lenders who are willing to give you money.
After three years (in some cases 1 year) after your bankruptcy, you will be able to get a new credit line.
Your non-exempt assets will be withdrawn and sold by a Trustee in a favor of your creditors.
All your credit cards will be taken off and you will be restricted from the chance to use any borrowed money.
You will have to spend about half a year on the bankruptcy process.
As your home (if any) will be withdrawn you will only be able to rent an apartment, as after the bankruptcy it will be almost impossible to get a home loan.
Chapter 7 does not write off such obligations as child support or alimony.
In a case of a Chapter 7 bankruptcy dismissal, you will be allowed to file for this chapter once again only in 180 days after your current filing.
How to file for Chapter 7
First of all, you will need to visit the website of the U.S. court and download the forms. After filling the forms you will need to pass the Means test where your median income will be calculated. Based on the results of this test it will be clear whether you qualify for Chapter 7.
After having the papers done and sent to the court you will be given a Trustee who will manage the process of your assets exemption.
After that, the Trustee will arrange a meeting of creditors where all your creditors will be presented. You will be asked questions about your financial situation and debts, and after the meeting (if successful), you will receive the court order. If during the process, the judge will find out that your income does not allow you to qualify for Chapter 7, your case may automatically be converted into Chapter 13.
Alternatives to Chapter 7
The most common alternative to Chapter 7 is Chapter 13 where instead of debts liquidation you will receive the right to repay your debts within 3-5 years with lower interest rate.
However, Chapter 13 requires much more efforts, time, and money. The court fee is higher significantly and you will need to create a professional debt reorganization plan to have it approved by your creditors and the court. Chapter 13 allows you to keep all assets you have, besides, you will be leading your regular lifestyle without going bankrupt. Though, you will still have to manage to find the money for your loans repayment.
The Pros & Cons of Making Yourself Bankrupt — Chapter 7
To many, chapter 7 bankruptcy – liquidation – proceedings are the most punitive form of debt management/repayment. While it many not be too difficult to understand why some creditors might wish to opt for this process, why would a debtor want to undergo this process?
The following is a list of 5 pros and 5 cons as to why you may want to consider chapter 7 bankruptcy proceedings:
1. The #1 reason why most debtors are willing to undergo chapter 7 bankruptcy proceedings is because the process is quickly over. Now, this is not to say that the record of your bankruptcy doesn’t remain with you for years to come – it does – but, the average time it takes to go from filing the chapter 7 papers to the relief process is around 6 months. Other, more conventional debt repayment programs, on the other hand, can take upwards of 6 years.
2. Although chapter 7 proceedings sound punitive, most states allow debtors to keep those things are considered necessary for their work. As a result, if structured correctly, a debtor can gain exemptions from chapter 7 proceedings for a large amount of their assets – thereby making the process all the more convenient and less painful.
3. “Because I’m young”. Although chapter 7 bankruptcy proceedings do stay on your records for some time, this really only becomes and issue if you are middle-aged. The reason for this? Because, in this day and age credit agencies specialize in lending to those with bad credit records – so it’ll not be too long before you can get hold of more credit cards and consumer loans, albeit at higher rates of interest. In the meantime, having gone through chapter 7 means that your creditors no longer have a hold on any future payments that you receive – in the same way they would if you undergo either chapter 13 bankruptcy, or a debt management program.
4. Provided you don’t owe money on a type of debt that would survive bankruptcy proceedings, there’s no quicker way to put an automatic stay on payments to creditors who you cannot pay.
5. And finally, chapter 7 bankruptcy proceedings have no threshold requirement when submitting a filing – unlike other types of debt relief, which may well have such a threshold requirement.
1. The #1 flip-side to chapter 7 bankruptcy proceedings is that, unless you can exempt them as being necessary for your work, you’ll lose all of the assets you have worked so hard for during your life to acquire. While this may not be such a problem if you are young, if you are middle-aged with young children, this becomes a serious issue.
2. Closely following #1 is the fact that you’ll have ruined your credit history for the foreseeable future. Now, this doesn’t mean that you won’t be able to obtain credit, you will. However, in order to get this credit you’ll need to be paying high fees and interest rates. Also, the sums lent will, normally, be dramatically less than you were previously getting, so you may not be able to borrow money to buy things such as a car or house for a while.
3. Once done – that’s it. One of the problems of chapter 7 bankruptcy proceedings is that once you have undergone a chapter 7 bankruptcy, you cannot use this method of debt relief again for at least another 6 years. As a result, if within those 6 years you need to seek debt relief again, the option of a chapter 7 filing is out.
4. Even though you file for chapter 7 bankruptcy proceedings, there is nothing stopping the courts from converting your chapter 7 case into a chapter 13 case if the court either thinks you have enough disposal income to repay your debt under a debt management program, or your creditor can provide evidence for this. As a result, you are not really driving the proceedings, others are.
5. Finally, saving the best for last, even though you have undergone chapter 7 – liquidation – proceedings, some types of debt you have created won’t simply go away. For example, if you have mortgage lien, expect to still have the obligation to repay on this even after your chapter 7 process has come to a conclusion.
Chapter 13 Bankruptcy
In times of serious financial hardship, many start thinking of giving up on their debts through filing for bankruptcy. The easiest and the fastest way to get your debts written off is filing under Chapter 7 which means instant debt liquidation. Seemingly the most attractive, Chapter 7 brings a pool of consequences many are not ready to face: withdrawal of assets, the title of bankrupt, inability to get a credit line and complications with getting a job – all these aspects make many refuse of bankruptcy idea.
Filing for Chapter 13 is a great “softer” alternative to debt burden liquidation, as this Chapter allows keeping all assets, including a house. By filing for bankruptcy under Chapter 13 a person gets an opportunity to reorganize their loans in order to repay the debt in a period of 3-5 following years. By having the petition approved by the U.S. court, the person acquires a protection from creditors and collectors (and their actions), while he/she still may lead a normal lifestyle.
The meaning of Chapter 13
How Does Chapter 13 Work?
Chapter 13 implies not a debt discharge, but a debt repayment plan where the debtor describes the way he/she plans to pay the part or the full amount of debt within three or five years.
Depending on the median income, the debtor may receive considerable interest rate reduction on their loans.
This plan must be approved by the creditors. After the bankruptcy petition is approved no actions from the side of creditors or collectors are legally allowed. The debtor wins time to get back on track and pay off the debt. Not a single asset will be withdrawn from a debtor in a favor of creditors within the period of bankruptcy.
Usually, people who do not qualify for Chapter 7 due to higher median income that required, file for Chapter 13 seeing it as a better alternative to the endless and exhausting trap of unbearable loans and taxes repayment.
In short, it’s a really efficient way to regain a control over own financial life without being constantly distressed by creditors.
Who can qualify for Chapter 13?
In order to qualify for Chapter 13, one must have enough income to pay at least the part of the debt. At the website of U.S. court, there is a full list of requirements for those who decide to file under Chapter 13.
Depending on the results of the test (where the income is calculated), the repayment plan will include the obligation to repay the whole debt or only a fracture of the debt. Other words, you will have to convince the court your earnings allow you to meet financial obligations described in your repayment plan.
There is also a debt ceiling for Chapter 13, so in case the total amount of your debt is over 394.725$ (for unsecured debts), you are ineligible for filing under this chapter.
When it comes to secured debts, the ceiling is 1.184.200$ for qualifying for Chapter 13.
What are the benefits of filing for Chapter 13?
Chapter 13 allows keeping all assets intact, while Chapter 7 implies assets withdrawal (with the purpose to sell it off).
People get a debt repayment delay for such non-dis-chargeable (under Chapter 7) debts like child support, taxes and penalties, alimony, student’s loan and some other types).
Chapter 13 doesn’t make you bankrupt in fact, unless you’ve violated the delay period of 3-5 years allowed by the bankruptcy petition.
You may still get a credit line from banks as to keep your usual comfortable lifestyle, while no creditor or collector is allowed to disturb you.
If after the certain period after the petition is approved the debtor still finds he is unable to repay the debt he/she may convert to Chapter 7 in order to have all debts dismissed instantly.
If, based on the changed financial situation, the debtor decides he doesn’t need the protection of Chapter 13 anymore; the bankruptcy could be terminated (with no fees or additional charges).
The terms of repayment plan are flexible and depend on your average earnings and other criteria, so it is fully customized in accordance with your needs and possibilities.
Cons of Chapter 13
Your debts cannot be just dismissed as if you would file under Chapter 7. If the test shows your income is enough to repay at least a tiny part of your debts, you will have to develop a repayment plan.
Filing for Chapter 13 is a longer and more expensive process.
You repay the debt from your disposable income, means you may not spend the money left from paying for food, medical care, utility bills, for something else than for repaying debts. Your expenses will be under the strict control.
If you’ll fail with getting approval filing for Chapter 13, it will become way harder to file for Chapter 7.
If you have previously successfully filed for Chapter 13, you will need to wait 6 years until it will be legally possible for you to file under this chapter again.
The same as with other chapters, the information about your bankruptcy will be publicly available for your potential employers and creditors. Needless to say, your credit score will drop dramatically.
File Bankruptcy Chapter 13
First, you must fill the forms, placed on the U.S. court website. You must calculate your income with the highest accuracy in order to avoid mistakes (which may cost you a refusal). Based on the results of the test, check it twice whether you do really qualify for Chapter 13.
You will have to develop debt repayment plan and get an approval of creditors. Before the court makes a decision on your petition, you will be invited to attend a creditors meeting, where you’ll be asked questions about your bankruptcy.
Chapter 12 Bankruptcy Explained
One of the least used bankruptcy Chapter in the USA is Chapter 12. It has a very narrow range of types of debtors who is eligible for this Chapter and we will describe it in details in our review.
Chapter 12 was invented by the Congress after many farms and fisheries faced severe hardship in 1980. Hundreds of operations were on the edge of financial catastrophe, and the opportunity to ease the burden and postpone the debt repayment became a very relieving solution. Taking into account that farms and fisheries are seasoned business, no wonder these are always under the risk of financial distress.
Chapter 12 bankruptcy allows a business like farms and fisheries create a repayment plan like it is possible under the Chapter 13. Still, Chapter 12 has a significantly higher debt ceiling and some other specifics we will review below.
Who is Eligible for Chapter 12?
Chapter 12 is only available for family farms and family fisheries suffering from serious financial hardship. Family businesses with significant debt and a willingness to repay the debt in the future may file for bankruptcy under Chapter 12.
Along with the debtor who files for bankruptcy, all connected to the farm (or fishery) family business individuals automatically receive protection from the creditors.
The debt ceiling for farms is $4,031,575 and for fisheries it is $1,868,200. As soon as a farmer or a fisherman files for a case, all creditors are prohibited to take any actions against the debtor. The debtor has a full and comprehensive protection from the government, even if not all creditors have approved the repayment plan developed by the debtor.
In order to receive a protection under Chapter 12, the debtor must match several key requirements. The court appoints a Trustee for the distressed farm or fishery, who arranges a meeting with creditors. Creditors interview the debtor about the bankruptcy and his financial situation as well as about the details of the repayment plan.
What are the benefits of Chapter 12?
Chapter 12 If we’ll compare filing for bankruptcy under Chapter 12 with other bankruptcy chapters, we’ll find out it brings the debtor several essential benefits:
The debtor keeps all the assets intact and his business performs in a normal mode without interrupting business processes. Instead of receiving the total debt discharge and starting everything from the blank sheet, the debtor receives the chance to get back on track as soon as possible and postpone the repayment of th debt.
Debt ceiling. The debt ceiling (the maximum sum of the debt) is much higher than for other chapters.
Automatic Stay. Right after the case is filed, the Automatic Stay comes into effect which means any actions from the side of collectors or creditors must be stopped immediately. Automatic Stay rule is valid for all members of the bankrupt business, not only for the person who applies and fills in the forms.
Specifics of filing for bankruptcy under Chapter 12
filing for bankruptcy in order to have a court protection under Chapter 12, a family farm or fishery will have to prove the debts have arisen exactly from the family business operations. All financial papers will be evaluated thoroughly by the court and if the court will find out the unbearable debt was a result of intentional actions (or easily preventable negative factors), the debtor will get a refusal.
The repayment plan has to be very specific and show the exact scheme on how the debtor will repay the debt in following 3-5 years.
After the judge has approved the plan, all the payments will be made through the Trustee. The Trustee distributes the money between creditors in accordance with the agreed priority.
Chapter 11 Bankruptcy: An Overview
Chapter 11 is one of the most popular among business entities, as it was designed especially for financially drowning business corporations. Chapter 11 is named after the Bankruptcy Code 11 and it allows businesses reorganize their debts, obligations, business processes, and assets in order to keep the business afloat.
Chapter 11 for business basically plays the same role as Chapter 13 does for individuals, where debts are not just liquidated, but instead, a debtor wins time to manage their finances and regain the control over the situation.
As it is designed to help the business get out of hardship, this Chapter is reasonably highly expensive to file for. Thus, the entity must do a thorough financial analysis before making a final decision.
Filing under this Chapter has many benefits for a corporation. In a case of success with approving the petition and reorganization plan, the company can keep all business processes alive and active which gives a company great chance to earn the money without being disturbed by creditors.
In fact, lots of well-known corporation are filing for bankruptcy from time to time to get debt relief. Therefore Chapter 11 could be considered an efficient tool for managing financial distress.
Who Can File Under Chapter 11?
Bankruptcy code allows companies, partnerships, and corporations file for bankruptcy under Chapter 11 when they meet a number of requirements. Only in this case, the Federal law provides the business legal protection from creditors.
Unlike Chapter 13, Chapter 11 does not have a debt ceiling (the maximum amount of debt). On the other hand, Chapter 11 requires more comprehensive and detailed reorganization plan to be developed by the debtor and approved by the creditors.
In fact, reorganization plan plays a role of an Agreement between the company (the debtor) and his creditors, where creditors agree with the offered plan and a manner of debt repayment in the future.
There are four criteria upon which the court does or does not approve the plan:
Feasibility: in short, the court must find the plan plausible and reasonable. That means that court’s financial specialist must confirm that the offered calculations on planned income and the overall strategy seem likely to succeed.
Must be fair and equitable: in a case of secured debts, all creditors must receive from the debtor at least the value or collateral.
Good faith: the debtor must convince the court that the plan is created at its best and with a solid and good faith in what’s written down.
Must match creditors interests: according to the plan, all financial operations and efforts should be directed, first, to finding funds for repaying the debt the soonest possible.
According to the official statistics, the major part of cases under Chapter 11 is dismissed due to parties (creditors and a debtor) have come to a mutual agreement before the court. The operations, though, must be in line with the plan’s strategy. The Trustee (if any) must supervise whether the operations are aligned with the reorganization plan.
What Does the Bankruptcy Bring to the Debtor?
The court may or may not appoint a special Trustee who will look after the business operational processes if the court finds it reasonable. The purpose is to help the company get an income which will meet the reorganization plan. In other cases, the business entity acts without supervision in a regular mode but without the pressure from creditors.
However, the court must approve each big business decision like assets sale or assets relocation. Also, the entity must acknowledge the court and get an approval in following cases:
the decision to close or reorganize any departments or terminate certain business processes;
making agreements concerning getting new loans after the filing for bankruptcy;
hiring (and paying considerable fees) attorneys or other law specialists after the case is filed;
creating or entering business unions which involves assets or funds relocation.
In the rest of cases, the debtor has full rights to act upon own business decisions in accordance with the plan confirmed by the court. The operations, though, must be in line with the plan’s strategy. The Trustee (if any) must supervise whether the operations are aligned with the reorganization plan.
What are Consequences of Becoming Bankrupt Under Chapter 11?
First of all, a debtor must get themselves prepared for a long process. Filing for bankruptcy under Chapter 11 may take up to 2 years, depending on the sum of debts. Moreover, sometimes, creditors may file against the debtor and this can drag out the case.
What is good for the debtor is all assets remain within the business; still, these assets cannot be freely sold or relocated. All assets and business possessions (equipment, buildings, the land, etc) can still be used in the interest of this particular Company.
Contrary to common belief, Chapter 11 is also available for individuals, not only for businesses. Yet, it is highly unpopular chapter among individuals to file for due to very high fees and strict requirements.
The rate of successful cases of bankruptcy under Chapter 11 is catastrophic now in the USA – about 15%, still, it’s the best chapter for corporations in terms of flexibility, freedom of actions and the minimum impact on vital operational processes.