My Road Back From Bankruptcy

Posted on: 22 December 2022

When bankruptcy lawyers talk with potential filers, one of the first issues usually covers what type of filing is necessary. Choosing might not seem like a huge problem, especially given you can only pick one of two types. However, you should discuss the choices with a bankruptcy attorney before filing.

Two Types

First, you should understand what the two kinds of bankruptcy cases are. These are liquidation and restructuring cases. Liquidation is what people generally know as Chapter 7. Restructuring can occur under Chapter 11 or 13. Chapter 11 is most common for businesses, although some individuals with significant debts might file this way, too. Chapter 13 is the form of restructuring for most people if they want to restructure.

Specialized versions of bankruptcy also exist, such as Chapter 12 which covers family farms and fishing operations. Most of these are just different forms of restructuring, though.

Liquidation

Chapter 7 liquidation is a common choice, especially for people and businesses that appear overwhelmed by their outstanding debts. If you're at the point where your utility and credit bills are too much, liquidation is a possibility. The liquidation process involves selling a filer's non-exempt assets to raise money to pay creditors. Once the court runs out of assets, though, there's no further effort to pay. The court discharges the remaining unpaid debts, and the creditors can't bring further action against the filer.

Restructuring

You might have enough money to pay if the court could restructure your debts. For example, a Chapter 13 petitioner might offer a payment plan where they cover 60% of the remaining balance on their restructured debts. The creditors take what a bankruptcy lawyer sometimes calls a haircut, but the debtor makes a good-faith effort to pay at least part of what's owed.

Notably, restructuring is only available for secured debts. These are things like car loans and home mortgages where the creditor can repossess the associated assets. Also, if the debtor is underwater on the asset, meaning they've already paid more than its current market value, the court may discharge the debt entirely. This can be a useful tool, especially during recessions when depreciating car and housing markets often leave filers with few good options in terms of paying.

Choosing

Presuming you qualify to file a particular way based on your current income, the choice hinges largely on secured versus unsecured debts. A renter without a car loan, for example, might simply liquidate to have the whole thing done in one shot. Conversely, someone who wants to hold onto a house they've paid on for years might elect to restructure.

For more information, contact a bankruptcy attorney in your area.