Most people in the United States are familiar with the term bankruptcy, but are unsure how it really works.
One reason for the mass confusion is that there are several types of bankruptcy, and each one can each affect your credit and finances differently.
In short, bankruptcy is a legal means of getting rid of certain debt or going on a new, more affordable payment plan. You’ll have to pay a fee in order to file, and you can face severe credit damage for years following your bankruptcy, but for some people it may be the only way to become debt-free.
Chapter 7
Who its for: Individuals and businesses
Cost to file: $338
Chapter 7 bankruptcy, sometimes referred to as liquidation, is the most common type of bankruptcy in the U.S., and the most basic form of bankruptcy.
For filers, Chapter 7 provides liquidation of their property and then distributes the proceeds to creditors to repay some or all of what they owe. Individuals may be allowed to keep “exempt property” that has minimal value, and/or keep property if they wish to continue paying any outstanding loans.
Chapter 9
Who its for: Municipalities
Cost to file: $1,738
Chapter 9 bankruptcy is a bankruptcy for municipalities—cities, towns, counties and school districts, for example. Municipalities that file chapter 9 earn protection from creditors while they develop a plan for adjusting their debts. In 2013, the city of Detroit filed chapter 9, becoming the biggest city in the history of the U.S. to file Chapter 9.
Chapter 11
Who its for: Individuals and businesses
Cost to file: $1,738
Chapter 11 bankruptcy is a reorganization bankruptcy usually filed by businesses. In contrast to chapter 7, the debtor remains in control of business operations and doesn’t sell off all of its assets. Instead, the businesses will attempt to change the terms on debts, such as interest rates and minimum payment amounts, so it can come out of bankruptcy as a healthy business.
Chapter 12
Who its for: Family farmers and fishermen
Cost to file: $278
This form of bankruptcy is designed for family farmers and family fishermen who are under financial distress but are earning income. Similar to chapter 13, chapter 12 puts the debtor on a plan to pay back creditors over a period of three to five years.
Chapter 13
Who its for: Individuals
Cost to file: $313
One of the main benefits of filing Chapter 13 bankruptcy is that a debtor can stop foreclosure proceedings on their home. In chapter 13, also known as a “wage earner plan”, an individual who has regular income has the opportunity to restructure their debt payments.
Through this chapter, the filer sets up a three-to-five-year debt payment plan based on what they can afford, and may have some or all of their remaining debt discharged after the payment plan ends.
Chapter 15
Who its for: Individuals and businesses with foreign debt
Cost to file: $1,738
In 2005, Chapter 15 bankruptcy was added to the U.S. bankruptcy code. Chapter 15 bankruptcy provides a way to deal with debt owed in more than one country, and is meant to facilitate cooperation between a foreign debtor, foreign courts and the U.S. bankruptcy courts. Therefore, a foreign debtor who has assets in a number of countries might consider filing chapter 15.
Should you file bankruptcy?
For some people, filing bankruptcy is the only way to get out from underneath a mountain of debt. But filing bankruptcy has long-lasting consequences so it’s not a decision to be taken lightly. Considered these pros and cons before filing:
Pros
- Dismiss unaffordable debt.
- Stop debt collection calls and letters.
- Halt foreclosure and repossession proceedings.
- Potentially protect some of your assets.
- Damage to credit is not permanent.
Cons
- Court filing fees.
- Credit reports will show bankruptcy for 7-10 years.
- Major hit to credit scores.
- Difficulty qualifying for loans and credit cards for several years after filing.
- Forced closure of some or all credit cards.
- Some debt can’t be discharged, including most taxes and student loans.
If you’re looking for a way to manage debt, bankruptcy is just one option. You can get professional help navigating all of your options by talking to a certified credit counselor. A counselor can walk you through all of your options, which may include bankruptcy, going on a debt management plan or working with your creditors directly.