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What Type of Bankruptcy Is Chapter 7?

Bankruptcy can knock you flat while you’re trying to move forward. For example, you take out a student loan or other credit that you can’t pay, and suddenly you are forced to declare bankruptcy. Well, for starters, what is bankruptcy? Bankruptcy is a state of insolvency in which an individual or organization cannot repay their debts. 

The term “bankruptcy” is also used to refer to the legal status of an insolvent entity. This article explores the main types of bankruptcies, starting from personal (Chapter 7) to corporate bankruptcy (Chapter 11) and many variations in between.

Depending on the specific type of assets a person has and their amount of income, there are numerous forms of bankruptcy that may be attainable. Your bankruptcy attorney in Rockville can provide the best legal advice if in case you are considering bankruptcy.

Understanding the Different Types of Bankruptcies

what type of bankruptcy is chapter 7

According to the United States Bankruptcy Code, there are six distinct categories of bankruptcy. Each of them is called after the chapter in which it is discussed. Thus, we have:

  • Chapter 7 (liquidation)
  • Chapter 9 (adjustment of municipal debts)
  • Chapter 11 (reorganization)
  • 12th Chapter (adjustment of debts of a family farmer or fisherman with a regular annual income)
  • Chapter 13 Bankruptcy (adjustment of debts of a person with a regular income), and 
  • Chapter 15 (ancillary and other cross-border cases). 

These chapters apply to a variety of situations and entities. The most often used bankruptcy chapters are Chapter 7 and Chapter 13 for individuals and Chapter 7 or Chapter 11 for businesses. 

We’re going to highlight the most common type of bankruptcy in this post. Chapters 7, 11 and 13.

Bankruptcy Chapter 7

What type of bankruptcy is chapter 7?

Chapter 7 bankruptcy is a very common type of bankruptcy. It is available to individuals who are unable to make regular monthly debt payments. Businesses that wish to close their doors may also file for Chapter 7. Chapter 7 provides debtors with relief regardless of the amount of debt owed or the debtor’s financial situation. The bankruptcy court assigns a Chapter 7 Trustee to liquidate the debtor’s assets and distribute the proceeds to creditors.

To fully benefit from bankruptcy laws and obtain a fresh start, it is critical that you refrain from incurring additional debt.

When Can You File for Bankruptcy Under Chapter 7?

Numerous indicators show that you should file for Chapter 7 bankruptcy. The following are five main reasons why filing for Chapter 7 may be the best course of action:

  • Your obligations exceed 50% of your annual income.
  • Even if you worked diligently, paying off your debt would take five years (or more).
  • Debt puts pressure on critical elements of your life, including your relationships and capacity to sleep.
  • You have little to no more funds
  • Your monthly revenue is below the state’s median.

Learn More: Does filing Chapter 7 mean you will lose everything you own?

Bankruptcy Chapter 13

A chapter 13 bankruptcy is sometimes termed a wage earner’s plan. It helps individuals with regular income to design a plan to repay all or a portion of their obligations. Underneath this Chapter, debtors establish a repayment plan to settle dues to creditors between three to five years. 

If the debtor’s current monthly income falls below the state’s median, the plan will be for three years unless the court permits a longer time “for the cause.” (1) If the debtor’s current monthly income is larger than the appropriate state median, the plan normally must be for five years.

Bankruptcy Chapter 11

What type of bankruptcy is chapter 11?

Chapter 11 bankruptcy utilizes reorganization to assist businesses that are heavily in debt. Under the United States Bankruptcy Code, businesses who apply for Chapter 11 bankruptcy protection engage with creditors to reorganize their debts and enterprises.

The company submits a proposed post-bankruptcy plan, which may include the following:

  • Cost savings
  • Pursuing new revenue streams
  • Postponing payment to creditors in the short term
  • Profitable business concepts

Chapter 11 Bankruptcy Benefits

Chapter 11 bankruptcy reorganization offers some significant advantages. It:

  1. Avoids the business’s complete liquidation (your business can stay in operation)
  2. Allows for more time to prepare and file a plan
  3. Enables reorganization of ineffective processes 
  4. Permits you to keep control of your enterprise

On the other side, Chapter 11 bankruptcy is more time consuming and expensive than other types of bankruptcy.

Filing Bankruptcy

Bankruptcy filling is a judicial process that either lowers, revises or removes your obligations. Whether you obtain that opportunity is up to the bankruptcy court. You have the alternative of filing for bankruptcy on your own, or you can contact a bankruptcy lawyer, which most experts see as the wisest option to take.

Bankruptcy costs include legal fees and filing fees. If you file on your own, you will still be responsible for filing fees.

Before you file, you must equip yourself with what occurs when you file for bankruptcy. It’s not just a question of telling a court, “I’m broke!” and placing yourself at the mercy of the court. There is a procedure — a sometimes complex, often convoluted process – that people and corporations must follow: 

  • Prepare financial records: List your debts, assets, income and spending. This offers you, anybody aiding you, and eventually the court, a greater knowledge of your circumstances.
  • Acquire credit counselling around 180 days before filing: You can’t file for bankruptcy unless you’ve gone through needed bankruptcy counselling. It convinces the court you have tried all other avenues before filing for bankruptcy. 

The counsellor must be from an approved source listed on the U.S. Courts webpage. Most credit counselling firms offer this service online or over the phone, and you obtain a certificate of completion once it’s done that must be part of the documentation you file. If you omit this step, your filing will be denied.

  • Submit the bankruptcy petition: If you haven’t engaged a bankruptcy lawyer yet, this could be the time to do it. Legal representation is not a necessity for persons filing for bankruptcy, but you are taking a major risk if you represent yourself. 

Understanding federal and state bankruptcy rules, and knowing which ones apply to your case, is vital. Judges are not authorized to provide advice, and neither are court workers. There are several forms to complete and some crucial variations between Chapter 7 and Chapter 13 that you should be aware of while making judgments. 

If you don’t know or follow the correct processes and rules in court, it might affect the outcome of your case. Whatever work you put in can lead to dismissal if there is even a slight mistake in the documentation. Without legal guidance, you’re also risking a danger that the bankruptcy trustee can take and sell your property.

  • Meeting with creditors: When your petition is granted, your case is handed to a bankruptcy trustee, who arranges a meeting with your creditors. You must attend, but the creditors will not have to be present. This is a time for them to ask you or the court trustee questions concerning your case.
  • Attend a financial management class: Before your debts are discharged,  you will also need to attend a post bankruptcy debtor education course.  SImilar to the credit counseling program before filing bankruptcy,  the course is also offered by court-approved providers

Bankruptcy can be a very hard decision to make….

When you declare bankruptcy, you aim to make a fresh start, free from the worries of being unable to pay your bills. But what is the best type of bankruptcy for you? Regardless of which type of bankruptcy you choose, a competent bankruptcy attorney from Kurland Law Group offers comprehensive, hands-on legal counsel to anyone who is planning to file bankruptcies. To set a schedule for a free consultation, call us today at (301) 804-0625

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