For individuals deep in debt, declaring bankruptcy may be their only choice. While bankruptcy helps you find relief from your debt, it has long-lasting consequences. Many view it as a last resort—and for a good reason.
Declaring bankruptcy will remain on your credit for up to 10 years, affecting your ability to get loans and credit cards.
While it’s unfortunate, bankruptcy is a reality to many Americans. It doesn’t spell the end, though. bankruptcy often provides second chances for those who declare it. If you want to learn more about bankruptcy, you’re in the right place. We’re here to break down how bankruptcy works and the different types of it.
Here’s a simple definition of bankruptcy to make things clear: Bankruptcy is a federal legal process aimed to help individuals and businesses in debt. It can help them eliminate all of their debt, part of their debt, or help them repay it. It’s a tricky process, though, especially if you’re a business owner who owes unpaid wages to employees.
There are three distinct types of bankruptcy, each with its own use. Here’s a detailed breakdown.
What Is Chapter 7 Bankruptcy?
Filing Chapter 7 bankruptcy means you have to sell some of your property to pay your creditors. It’s often referred to as “liquidation bankruptcy,” as it involves liquidating your assets. A bankruptcy trustee will oversee and handle the property’s sale.
They can only sell your property not protected by an exemption. If everything you own is exempt, the trustee cannot sell any of your property. In these scenarios, Chapter 7 cases only last between four and six months. While businesses can file Chapter 7, it’s more common for individuals.
What Is Chapter 13 Bankruptcy?
Chapter 13 is exclusive to individuals. In these cases, you set up a repayment plan to repay a portion of your debt. Instead of repaying the full amount, you’re only responsible for part of it. However, you can’t file Chapter 13 if your secured and unsecured debt is over a certain limit.
What Is Chapter 11 Bankruptcy?
While individuals can file Chapter 11, it’s rare due to the high price involved. The attorney fees start at $15,000—far out of most individuals’ price range. Mostly only businesses use Chapter 11, but high-earning individuals with too much debt can file as well.
This is a quick overview of how bankruptcy works and the different types of it. It’s a legal process that can give individuals and businesses a second chance, even if it feels like giving up at first. If you feel buried in debt, filing bankruptcy can be a way out.