Chapter 7, Chapter 11, or Chapter 13 Bankruptcy: Which to Choose?
When a business or individual debt becomes unmanageable, filing for bankruptcy can be a solution.
Whether overwhelmed by secured debts—for example, seizable assets, or debts to unsecured creditors, such as credit card companies—filing for bankruptcy can help clear them.
However, not all people or businesses qualify for bankruptcy. Federal judges determine which cases proceed to bankruptcy court. In addition, there are different forms of bankruptcy. It is important to apply for the appropriate chapter, and a bankruptcy attorney can ensure that you do this.
In Nashville, TN, the majority of bankruptcy claims are from chapters 7, 11, and 13 of the federal bankruptcy code. The following is a brief explanation of how they work and how they differ.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy helps private citizens and businesses when they have greater debt than they can hope to repay.
To determine Chapter 7 eligibility, a means test is conducted. In this, the previous 6 months’ income for the individual, married couple, business, or business partners is compared to Tennessee’s median income. Then personal or business debts are weighed against existing debt to determine the applicant’s ability to clear them.
The formulas used in the calculations are complex and online tools rarely provide dependable results. A Tennessee bankruptcy attorney has access to the state data required and the experience necessary to make correct calculations. This particularly important inaccuracy can result in denial of the application.
After getting over the means test hurdle, those applying for Chapter 7 bankruptcy have to gather a considerable amount of information to qualify for bankruptcy. Once again, providing the right information is crucial to the application’s success. Such information includes:
- List of creditors, with the amount and type of debt for each
- The applicant’s income, including income sources and dates due
- Full details of the applicant’s property holdings, including mortgages and car financing information.
- Full details and proof of the applicant’s monthly expenses
Once in Chapter 7 bankruptcy, efforts will be made to repay as much of the debt as possible. This is likely to include business reorganization and a court-appointed trustee selling some of the debtor’s assets.
A Tennessee bankruptcy attorney will help you understand if you or your business are good candidates for Chapter 7 filings.
Chapter 11 Bankruptcy
Chapter 11 bankruptcies are not for individuals. They are for businesses that are unable to repay their debts. In the case of a Chapter 11 bankruptcy, a federal court oversees the business reorganization in the interest of the creditors, not the business itself. The number one priority is paying as much debt as possible. Once businesses enter Chapter 11 bankruptcy, they can continue operating, but every decision about finances is made in consultation with the bankruptcy court.
It is expensive to apply for and be in Chapter 11 bankruptcy and should not be considered before alternative ways to pay off debt prove impossible. Obtaining the help of an attorney who is highly experienced in Tennessee bankruptcy law is essential.
Chapter 13 Bankruptcy
When an individual has valuable assets but unmanageable debts, Chapter 13 bankruptcy might be the answer. Chapter 13 bankruptcy protects the individual’s assets while his or her debt is repaid via a repayment plan over a term of three to five years.
However, high, unmanageable debt doesn’t automatically qualify an individual for Chapter 13 bankruptcy. There are eligibility requirements, including:
- The filer must be an individual. Chapter 13 bankruptcy is not for businesses.
Debt level. Debt that is so high it can’t realistically be repaid via a repayment
- plan will not qualify.
- Income. To be granted Chapter 13 bankruptcy, the applicant has to demonstrate sufficient income to be able to make the debt payments and cover his or her regular expenses, including child support and home expenses.
- Completion of a government-approved debt and credit management counseling course. The counseling is part of the evaluation of the applicant’s income and is intended to give applicants the tools they need to avoid getting into debt in the future.
Applying for Chapter 13 bankruptcy is a very complicated process for which the assistance of a specialist bankruptcy lawyer is highly recommended.
Deciding on the right chapter of bankruptcy and then submitting an application that fulfills approval requirements can be difficult. The Tennessee bankruptcy law specialists at The Pope Firm have years of experience that can help make the bankruptcy process manageable.
Call 4239297673 today to see how we can assist you.
The Different Types Of Bankruptcy
Depending on your situation, there are different types, officially known as “chapters” of bankruptcy, that you can file for. These different chapters of bankruptcy provide different results for different cases, and it’s important to have some knowledge on these chapters before filing for bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a commonly filed for chapter of bankruptcy and is intended for use by low to moderate income individuals with more debt than they’ll ever be able to repay. If properly executed, this chapter of bankruptcy can eliminate most or all of a person’s unsecured debt. If you’re eligible, Chapter 7 could be a great debt relief solution for you.
Chapter 13 Bankruptcy
Another great debt relief solution is Chapter 13 bankruptcy, that works great for people that aren’t eligible for chapter 7 bankruptcy. This chapter allows the debtor, or person that has borrowed money, to restructure their payment plans to be more manageable. At the end of this payment plan, most unsecured debts are discharged, or eliminated. This is sure to provide some much-needed breathing room for those people that feel in over their head, and are in need of some debt relief.
If you need assistance with personal or business bankruptcy and filing in Tennessee, reach out to The Pope Firm and Charles Pope, Attorney At Law.
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Frequently Asked Questions
Bankruptcy occurs when an individual, business, or other entity declares the inability to repay its debts. If you file for bankruptcy, that means that debt collectors must pause attempting to collect debts from you. Bankruptcy often allows you to erase most, if not all, of your debts.
There are two types of debts, unsecured and secured. Some examples of unsecured debts are credit card bills, medical bills, or taxes. Secured debts can include car loans or mortgages, which use the purchased item as collateral. In many cases, filing for bankruptcy can keep this collateral protected and prevent foreclosure of your home or repossession of other assets.
Bankruptcy is governed by federal legislation under the Bankruptcy Code, which falls under the greater United States Code. Both federal law and local law inform the bankruptcy procedure. Federal bankruptcy judges, appointed by the United States court of appeals, preside over court proceedings in these cases. In court, the judge and a court trustee, review your finances to determine whether or not to discharge the debts at hand.
Each state has one or more bankruptcy courts. Tennessee has six bankruptcy courts throughout the state.
Filing for bankruptcy can be a daunting process, and working with a firm with expertise in the field can provide you with necessary guidance.
There are several types of bankruptcy. Most individuals, married couples, and small businesses choose to file under Chapter 7 or Chapter 13.
What are the Differences Between Chapter 7 and Chapter 13?
The primary difference between these two types is that Chapter 7 bankruptcy allows an entity to fully discharge its debts in a short period. A Chapter 13 bankruptcy involves reorganizing debts and creating a plan to repay those debts over an allotted time. After that time, Chapter 13 eliminates most of the remaining debts.
Chapter 7 bankruptcy is typically filed by those with very limited income and unsecured debts, the most common of which is medical bills. Chapter 13 bankruptcy is most often filed by higher income bracket individuals and those with more assets, such as a car or a home. The motivation for filing Chapter 13 bankruptcy is often preventing assets from being repossessed or home foreclosure due to outstanding debts.
What Other Types of Bankruptcy Are There?
Two other types of bankruptcy are Chapter 11 and Chapter 12.
Chapter 11 primarily applies to larger companies and corporations, but sometimes it is the right choice for small businesses as well. Chapter 12 applies to those who are considered family farmers.
Various considerations get factored into who should file bankruptcy. Filing bankruptcy may be the right choice for you if you are overwhelmed by debt. Regardless of what type of bankruptcy you file, as soon as the process begins, you are granted an automatic stay. A stay is an injunction that prevents creditors from collecting any debts for an allotted time. An automatic stay halts the process of, for example, foreclosing on a home or repossessing a vehicle.
A Chapter 7 bankruptcy will discharge most of your debts. Filing Chapter 7 is appropriate for those who make less than the median household income in Tennessee and whose assets would not be at risk. In this situation, your non-exempt property is sold to pay off creditors.
Chapter 13 bankruptcy allows you to create a plan to repay your debts. If you have non-exempt property used as collateral in secured loans, you can restructure your finances to pay off any relevant debts over the next three to five years. Chapter 11 functions in a similar way, but is exclusively for businesses.
Filing for bankruptcy can provide a fresh start for those bogged down with debt, either by restructuring finances or discharging debts entirely.
How bankruptcy affects business depends upon the type of bankruptcy filed.
Businesses classified as corporations, partnerships, or LLCs can file Chapter 11 bankruptcy. Chapter 11 allows for debt restructuring, while the business stays open. As in Chapter 7 and Chapter 13, an automatic stay activates as soon as your bankruptcy period begins. In an automatic stay, creditors cannot try to collect money or other assets from you.
During this period, you work with your lawyer to restructure your debts and develop a plan to get your business back on track. This plan must be approved by some of your creditors and a bankruptcy court to go forward. You will be able to repay your debts over several years.
Filing Chapter 7 bankruptcy discharges all of your business’s debts by liquidating your assets. The entire process can be completed quickly, often in several months. Chapter 7 allows for the discharge of most debts, excluding government taxes and fines.
Only individuals can file for Chapter 13 bankruptcy. Thus, although businesses cannot file, you can file Chapter 13 as the sole proprietor of your business.
When you decide to begin the bankruptcy process, the first step is to find a lawyer who is an expert in filing bankruptcy in Tennessee. Hiring a bankruptcy lawyer can indeed be expensive, but it is worth the cost. This professional can guide you through what type of bankruptcy is best for your situation and what to expect throughout the process.
- Collect your documents: It is important to have everything from your paystubs to your credit report available before starting.
- Take the means test. This test will determine if you are eligible for Chapter 7 bankruptcy and help guide you in making a repayment plan for Chapter 13 bankruptcy.
- Meet with a credit counselor. In the state of Tennessee, most individuals must meet with a credit counselor from an approved provider before filing for bankruptcy.
- Fill out bankruptcy forms. If working with a lawyer, you can expect they will use online programs to help you file your paperwork.
- Pay your filing fee. It costs $335 to file for bankruptcy in Tennessee. Waiver of the fee is possible in some cases, but it is uncommon. However, it is possible to pay the fee in several installments instead of the entire balance upfront.
Declaring bankruptcy wipes out many debts, but not all.
What Debts are Usually Covered by Bankruptcy?
Bankruptcy can clear most unsecured debts, including:
- Credit card bills
- Medical bills
- Overdue utility payments
Bankruptcy can also clear many secured debts, but it depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. For Chapter 7, you will have to give up any non-exempt items you put up for collateral. For Chapter 13, they will become part of your repayment plan.
What Debts Are Not Covered by Bankruptcy?
- Child support
- Alimony obligations
- Those related to personal injury or death in a drunk driving case
- Any debts not listed on your bankruptcy papers
No type of bankruptcy covers these debts. If you file for Chapter 7, they remain outstanding. Under Chapter 13, you pay these debts along with your other debts.
What Debts May Be Covered?
Bankruptcy rarely covers student loan debt. However, it may be in some cases with proof of undue hardship.
Tax debt is also rarely covered, but bankruptcy may cover certain old unpaid taxes.