If you have money on your mind, you’re far from alone. One 2019 study found that 56% of all U.S. adults admit to losing sleep over their finances.
When anxiety over your money spirals out of control, the decision to opt for bankruptcy can be a huge relief. Knowing that you’ll be able to manage your debts in a controlled way may even help you sleep better at night.
But a mental commitment to bankruptcy is only the first step. From there, you’ll need to choose which type of bankruptcy is right for your financial situation—which can be a surprisingly difficult decision.
If you’re not sure which bankruptcy method to try, we’re here to help. Let’s take a look at the different types of bankruptcy and how to choose between the most common options.
What Are the Different Types of Bankruptcy?
Bankruptcy is what happens when you owe more than you can afford to pay—but there are many different ways to declare it. Here’s a quick look at the spectrum of options:
- Chapter 7 bankruptcy: Also called “straight bankruptcy,” this is the most common type of bankruptcy for individuals, as it eliminates most kinds of debts.
- Chapter 13 bankruptcy: Another common option, this “reorganization bankruptcy” allows you to repay over a period of several years. In most cases only a fraction of the debt need be repaid.
- Chapter 11 bankruptcy: Often recommended for businesses and corporations, Chapter 11 bankruptcy helps companies keep operating while paying off debts
- Chapter 12 bankruptcy: Specific to farmers and fisherman, this type of bankruptcy offers more flexibility and higher debt limits
- Chapter 15 bankruptcy: This type of bankruptcy pertains to international businesses and deals with cross-border bankruptcy issues
- Chapter 9 bankruptcy: Financially distressed municipalities can use this type of bankruptcy to get protection from creditors.
Although there are six types of bankruptcy, Chapter 7 and Chapter 13 are the most common among individual filers. Though both of these options offer debt relief, they do so in different ways, so it’s important to understand when to file each.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy often provides an easy way to get out of debt fast, making it the more popular bankruptcy option for many individuals. With Chapter 7, you can eliminate most unsecured debt and some secured debts. You can keep your property if it is exempt. Most people are able to exempt all or most of their property.
When to File Chapter 7 Bankruptcy
The ideal candidate for Chapter 7 will meet a few key requirements.
First, your property will be mostly or completely exempt from creditors. In addition, the majority of your financial issues will revolve around unsecured debts like credit card debt, medical bills, and personal loans. Finally, your household income must not exceed Minnesota’s state median for the size of your family, except in certain circumstances. To understand if you’re a good candidate, you’ll need to take a means test to see if you qualify. As you might expect, unemployed filers often have better chances of qualifying for this type of bankruptcy.
Advantages of Chapter 7 Bankruptcy
If you do qualify for this type of bankruptcy, there are a few reasons you may want to choose it over Chapter 13 bankruptcy.
As mentioned above, it can be relatively fast, taking just three to six months in many cases. In addition, because many of your qualifying debts will be wiped out, you won’t need a repayment plan. In some cases, you can even protect your property or car—though this depends on your financial situation.
Chapter 13 Bankruptcy
In certain circumstances, Chapter 7 isn’t the right move. Instead, Chapter 13 bankruptcy can be an effective legal tool to help you reorganize your debt while protecting your assets.
When to File Chapter 13 Bankruptcy
Because you’ll need to commit to a repayment plan, only those with a steady income should consider Chapter 13 bankruptcy. You’ll need to pay your disposable income, meaning the amount of income remaining after considering bankruptcy expenses, to your creditors. This will continue for a set period of three to five years.
In some cases, filers with a high income may find that Chapter 13 bankruptcy is the only option available to them.
While Chapter 7 bankruptcy discharges common debts like medical bills and loans, it doesn’t wipe out every type of debt. This is where Chapter 13 can help: those with student loans, and tax debt, although most student loans are not forgiven, they cannot be collected while a ch. 13 plan is in effect.
Advantages of Chapter 13 Bankruptcy
While many people hope to avoid Chapter 13 due to its mandated repayment plan, this option has one key advantage: it doesn’t require asset liquidation. This means you can hold onto more of the belongings you treasure. This includes avoiding the foreclosure of your home, in most cases.
How to File for Chapter 7 or Chapter 13 Bankruptcy
There are two ways you may find yourself in bankruptcy. First, you may choose to declare bankruptcy of your own volition. Alternatively, your creditors may appeal to the local courts to order you into bankruptcy.
If you are filing of your own volition, the first step is to decide which of the options above is right for your needs. While a means test can help you understand whether or not you qualify, it may also be a good idea to reach out to an attorney as well. An expert can help you understand which of your debts can be discharged and which must be repaid.
A lawyer can also help you through the next steps for filing bankruptcy. This includes prompting you to take certain steps according to court deadlines, as well as helping you fill out documentation while avoiding common mistakes.
With Chapter 13 bankruptcy in particular, you will almost always need to work with an attorney. Because this option is more complex, it helps to have expert advice on determining a repayment amount and submitting a repayment plan to the Minnesota courts.
Hire a Bloomington Bankruptcy Law Firm
While a broad overview of the common types of bankruptcy can help, it’s important to consider your financial situation in full before making a decision. This is where a good lawyer comes in: the right support can help you secure the best bankruptcy terms as you make a fresh start.
When you’re seeking bankruptcy, Gregory J. Wald has a wealth of experience helping clients navigate the Minnesota bankruptcy process. To move forward with less stress and overwhelm, contact us today to get the support you need.