We all know the word bankruptcy. But until you find yourself facing this frightening situation, you may not know all the different forms it takes. Once you do start researching it, you might find yourself confused by the different numbers and their meanings, like Chapter 7 and Chapter 13.
There are three types of bankruptcies that make up the vast majority of all filings for businesses and individuals alike. As your experienced bankruptcy lawyers in Seattle, the Integrity Law Group team can help you navigate each of these options and choose what’s right for you. Here, we’ll compare the three types of bankruptcies you’re most likely to encounter.
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Why These Three Types of Bankruptcies Are Most Common
There are six types of bankruptcy: Chapters 7, 9, 11, 12, 13, and 15. Approximately 99% of bankruptcies are Chapter 7, 11, or 13, and of these three, Chapters 7 and 13 are the most common.
The reason Chapters 9, 12, and 15 are less common is that they are for very specific scenarios. Chapter 9 bankruptcy only applies to municipalities, like towns or school districts. Chapter 12 is specifically for family farmers or fishermen. The newest type of bankruptcy, Chapter 15, is for foreign cases involving assets in the U.S.
Chapter 7 Bankruptcy
Chapter 7 is the most common type of bankruptcy. It’s often the first choice for individuals because it offers a clean slate by discharging debts. While Chapter 7 bankruptcy comes with the significant downside of potential asset liquidation, in reality, most assets are exempt from liquidation, so people often lose very little of their property and still escape overwhelming debts to get a fresh start.
Who it’s for
Both individuals and businesses can file for Chapter 7 bankruptcy. However, it’s typically a more appealing choice for individuals than businesses. While most individuals who qualify for Chapter 7 will have very few non-exempt assets that they’ll lose, businesses that file Chapter 7 will shut down.
How it works
The general process for Chapter 7 is the liquidation of non-exempt assets, which is used to pay off as many debts as possible. Remaining debts (with some exceptions, like child support) will be discharged.
For individuals filing Chapter 7 bankruptcy, possible non-exempt assets would be things like secondary vehicles, extra property, investments, and valuables like jewelry. Your home, primary car, and personal belongings are usually protected from liquidation.
When businesses file Chapter 7 bankruptcy, it’s because they have no viable future and are shutting down. The business is not exempt from liquidation, so it will be sold to pay off debts. Once everything is liquidated and creditors are paid as much as possible, any remaining leases, contracts, or loans are generally written off.
Chapter 11 Bankruptcy
Though much less common than Chapters 7 and 13, Chapter 11 bankruptcy can still be an advantageous option for certain circumstances. It’s usually used by businesses that are financially struggling but don’t want to shut down.
Who it’s for
Businesses and individuals can file for Chapter 11 bankruptcy. It’s predominantly used by businesses, however, who are in financial strain but don’t want to shut down and liquidate. Usually, the only reason individuals would file for Chapter 11 is if they have too much debt to qualify for Chapter 13. Consequently, it’s common for celebrities or pro athletes, but the average individual is more likely to file for Chapters 7 or 13.
How it works
When a business files for Chapter 11, they get protection from creditors while they reorganize their operations, assets, and debts. The goal is that with some time and effort, the business can pay off its debts by improving its efficiency and profits. Chapter 11 filings were especially common during the COVID-19 shutdown of 2020 since many businesses were struggling but still had a viable future.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is similar to Chapter 11 except it’s only for individuals. Instead of a business reorganizing itself to pay off debts, individuals budget and create a repayment plan for their mortgages, personal loans, or other debts.
Who it’s for
Only individuals can file for Chapter 13. While those with low income and minimal assets usually choose Chapter 7, Chapter 13 is often a better choice for individuals with a stable income or extensive non-exempt assets they don’t want to lose in liquidation.
How it works
No assets are liquidated in Chapter 13. Instead, the filer works with the court and their creditors to create an extended repayment plan. Chapter 13 bankruptcy gives individuals more time to pay off their debts without losing any property and still ensures creditors get what they’re owed.
Choosing the Right Bankruptcy Option for You
Sometimes, the best bankruptcy option isn’t clear. There are also eligibility requirements, like the means test for Chapter 7 bankruptcy. Here are some general guidelines.
- Chapter 7 is best for individuals with low income and minimal assets, or failing businesses ready to shut down.
- Chapter 11 is best for businesses that want to recover from financial hardship or individuals with high income and high debt.
- Chapter 13 is best for individuals who don’t pass the means test for Chapter 7, or who want to protect their non-exempt assets.
Choosing the best option of the three types of bankruptcies is much more complicated than that basic overview, however. A bankruptcy lawyer can offer personalized guidance to help you make the right choice.
Consult a Lawyer About the Three Types of Bankruptcies Today
Making up 99% of bankruptcy filings, these three types of bankruptcies are most likely what you’ll choose–but which one? A case evaluation from an experienced lawyer is the first step toward financial freedom. From there, we can help you with every aspect of the complicated bankruptcy process, to make it as simple and successful as possible.
Contact Integrity Law Group today to speak to a bankruptcy lawyer in Seattle. Bankruptcy doesn’t have to be a financial catastrophe–with a little help, it can be a new beginning.