Is bankruptcy right for you?

Photo @WOCInTech

by Ethan D. Dunn, For New Pittsburgh Courier

What type of bankruptcy is right for me? Understanding the difference between a Chapter 7 and a Chapter 13.

Bankruptcy is often seen as a scary proposition. But the truth is, bankruptcy is just another tool you can utilize on your road to success. Understanding the bankruptcy options available to you and what they would mean for you or your business is essential to removing the fear and recognizing what is actually possible in bankruptcy. Bankruptcy can generally be understood as having two possible types: Reorganization (Chapter 13) and Liquidation (Chapter 7).

First, let’s get a basic understanding of each. In Reorganization, you are creating a plan to pay back your debts using a carefully planned budget that allows you to meet your basic needs and use the leftover cash to pay your debts. In order to successfully reorganize, you need to generate enough income to not only pay for basic needs, but also have some money left over that will be used to pay your debts. The money that is left over will be used to create a plan for repaying your creditors as much as you can afford.

If you put together a budget and it shows that you don’t have any money left over after paying for your basic needs, then Liquidation is an option. In this type of bankruptcy case, you are using your assets to pay your debts. The Bankruptcy Code allows you to keep many of the items you will need for your basic needs, but any items that you are not allowed to keep are sold for cash and that cash is used to pay as many of your debts as possible.

Reorganization is typically what you’re doing when you file a Chapter 11 or Chapter 13 bankruptcy. With few exceptions, a Chapter 11 bankruptcy is usually how businesses reorganize (think General Motors) and, although interesting, is not within the scope of this article. Individuals likely would reorganize their debts by filing a Chapter 13 bankruptcy. In fact, Chapter 13 bankruptcy is only individuals – companies cannot file a chapter 13.

The Chapter 13 bankruptcy lets you restructure your debts, while providing protection form creditors who may try to garnish your paycheck, levy your bank account or seize property that you own. The plan that you create with your attorney allows you up to five (5) years to repay your creditors as much as you can afford.

A Chapter 13 plan can be intricate as a result of the numerous competing interests of the debtor, creditors, and other interested parties. However, once the plan is approved by the courts and implemented, your old debts become part of the plan and as long as you make your plan payments and meet the other chapter 13 legal requirements, you will, with few exceptions, come out of the bankruptcy debt free.

Liquidation, on the other hand, is the form of bankruptcy that occurs in a Chapter 7 bankruptcy. Chapter 7 bankruptcy can wipe out many forms of overwhelming debt, but there are certain types of debt that a Chapter 7 cannot get rid of. In a chapter 7 bankruptcy, you may have to give up [or sell some of the things you own if the law doesn’t protect them. However, the good news is that in mist cases you are able to keep everything that you own and still get rid of your debt. Chapter 7 bankruptcy is the most common form of bankruptcy, and, unlike reorganization is a Chapter 13, this type of liquidation usually only takes 3-4 months before you receive a discharge.

Above are just come of the generalities about the types of bankruptcies most people file and there are a number of considerations that go into deciding whether a reorganization or liquidation bankruptcy makes the most sense. Be sure to talk with your attorney about your income, expenses, assets and debts so that together you can make the best decision for your situation. 

(Ethan D. Dunn is a member of Wolverine Bar Association and is the managing member of MAXWELL DUNN, PLLC. A boutique business and bankruptcy law firm.

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