While going through bankruptcy isn’t easy, this legal proceeding promises financial freedom for individuals and organizations immobilized by overwhelming debt.
However, the degree to which bankruptcy is a solution for your financial difficulties depends on choosing the right type of bankruptcy.
If you’re thinking of declaring bankruptcy in the Montgomery, Alabama area, understanding your options can help you make the most informed and beneficial decision about how to proceed—starting with which bankruptcy type is best for you.
Here, we’ll take a closer look at the three main types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13, including when they’re appropriate and what’s involved in each process.
We’ll also highlight why finding a trusted bankruptcy lawyer in Montgomery, AL, is a critical step in the bankruptcy process if you live in this region.
What is Chapter 7 Bankruptcy?
When the word “bankruptcy” is mentioned, Chapter 7 bankruptcy—also known as “liquidation bankruptcy”—is likely what comes to mind. The most commonly utilized type of bankruptcy, Chapter 7 involves the liquidation of assets in order to pay off as much of your debt as possible. Any leftover debt is then dismissed. The result? A “clean slate” for debtors to start over.
While many assets are lost during Chapter 7 bankruptcy, the majority of Chapter 7 bankruptcies are “no asset” cases, meaning that the debtor lacks sufficient equity to be seized and liquidated.
Additionally, state-determined exemptions offer certain protections. Alabama’s bankruptcy exemptions include the Real Property exemption, which covers the value of a personal residency; and Personal Property exemptions, which may include non-real estates personal property such as cars, furniture and other household goods, jewelry, proceeds from personal injury lawsuits, and more. Both of these are capped amounts.
Furthermore, some types of real and personal property have complete protection from liquidation with no limits. These include social security benefits, worker’s compensation, and IRS-qualified retirement accounts.
On the other hand, certain debts cannot be wiped clean. These include most student debt, alimony, child support, property liens, and some taxes.
One note? While debt for businesses in Chapter 7 is not discharged, the practical effect is the same in that credits are paid to the fullest extent, and the business owners walk away unencumbered—unless they’d assume personal liability for the debts of the business.
In order to file for Chapter 7 bankruptcy, you must qualify for it—either based on your income or a “means test.”
The Chapter 7 process typically takes between four and six months, with the bankruptcy remaining on your credit report for up to 10 years.
What is Chapter 11 Bankruptcy?
Unlike Chapter 7 bankruptcy, Chapter 11 bankruptcy involves a reorganization—rather than a liquidation—of debt. While this type of bankruptcy is usually used to provide relief to corporations and partnerships, individuals are also eligible.
With Chapter 11 bankruptcy, some or all debt is restructured and rolled into a payment plan, which may then be approved and overseen—along with all significant business-related decisions—by a court-appointed Trustee. All the while, troubled businesses are able to remain open and operational.
Many obligations can be canceled, including loans, leases, supply and vendor agreements, and other contracts and debts that can be canceled with Chapter 11. Upon completion of the plan, any remaining debt is discharged. There are no debt-level limits, required income, or time limits with Chapter 11 bankruptcy.
While Chapter 11 bankruptcy may sound straightforward, it can be a complex, lengthy, and expensive process. However, it is a potential path to profitability for companies in need of protection from creditors while they attempt to improve their business operations.
Companies like Marvel Entertainment, Six Flags, and Sbarro are all Chapter 11 success stories in that they survived the process and emerged as viable companies. However, in other cases, this type of bankruptcy is ultimately just buying time for companies destined to fail.
What is Chapter 13 Bankruptcy?
Like Chapter 11 bankruptcy, Chapter 13 focuses on debt restructuring as opposed to the liquidation involved with Chapter 7. However, unlike Chapter 11, eligibility for Chapter 13 is limited to individuals who are overwhelmed by debt while also bringing in a steady income, although it can also be used by sole proprietorships.
With this type of bankruptcy, individuals must also submit and execute a repayment plan for debts to be completed within 3-5 years. Also called a “wage earner” bankruptcy, Chapter 11 involves paying a pre-set monthly amount to a trustee, who then pays creditors on behalf of the debtor.
A primary benefit of opting for Chapter 13 bankruptcy is that it can prevent the liquidation of some assets—oftentimes, the forced sale of a home. In fact, missed mortgage payments are often the precursor to filing for this type of bankruptcy.
Chapter 7 vs. Chapter 11 vs. Chapter 13
While the three main types of bankruptcies share commonalities—such as making debt more manageable and putting an automatic end to collection efforts—they also share key differences.
Now that we’ve drilled a bit deeper into each type of bankruptcy, here’s a brief breakdown of when each might be appropriate:
- Chapter 7 may be the best choice for individuals and businesses with more debt than they’ll ever be able to pay back based on current income and assets
- Chapter 11 may be the best choice for big businesses and sole proprietorships that are burdened by debt, but wish to continue operating while restructuring their operations to achieve profitability
- Chapter 13 may be the best choice for individuals (as well as unincorporated businesses) that are unable to meet their financial obligations despite having a regular income
Which Type of Bankruptcy is Right for You?
In the calendar year of 2022 alone, there were 387,721 bankruptcy filings in the United States. All of these stemmed from different causes (or combinations of causes), such as medical crises and related healthcare expenses, loss of income, unaffordable mortgages, and excessive spending. As such, they often merit different solutions.
The takeaway? No one type of bankruptcy is “better” than the others. Instead, the bankruptcy type that’s best for you depends on your unique situation and goals.
Finding a trusted bankruptcy lawyer in Montgomery, AL, can help you understand and assess your options in order to make the most educated and beneficial decision regarding how best to position yourself for future financial health.
Finding a Trusted Bankruptcy Lawyer in Montgomery, AL
Finally, it’s important to underscore that bankruptcy is not a foregone conclusion if you are struggling with debt. This is yet another reason to consult with a legal professional who is familiar with your state laws, as well as federal rules and regulations.
An experienced bankruptcy attorney will also work with you to explore alternatives to bankruptcy to determine whether there’s a preferable route, such as credit counseling or debt consolidation.
Wow, I never knew that a bankruptcy lawyer could help you get over your debt by restructuring them! It does make sense to seek out these professionals to ensure you can repay your creditors. I will keep this in mind if I end up needing their help someday.