C is for Chapter in the ABCs of Bankruptcy

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C is for Chapter in the ABCs of Bankruptcy

Most people do not have a thorough understanding of bankruptcy, primarily because most people want to avoid bankruptcy at all costs.  However, sometimes bankruptcy can be a necessity, a strategic move, or a fact of life.  For this reason, it is a good idea to have a basic understanding of the different types of consumer bankruptcy, who can file them, when they should be filed, and what the impact of filing is.  Every client who meets with any sort of debt counselor, especially a bankruptcy attorney, is required to receive certain notices under §362(b) of the bankruptcy code.  Part of these notices is an explanation of Chapter 7, Chapter 11, Chapter 12 and Chapter 13.

The very basic overview is that a Chapter 7 is “liquidation,” Chapter 11 is for “Reorganization” for businesses, individuals and railroads, Chapter 12 is for family farmers and fisherman, and Chapter 13 is for a person to pay back some of their debts.  If you find yourself in need of filing a bankruptcy, the basic overview may not be enough. This post is for you.

First, the very basic differences between the 4 Chapters available to Consumers:

Bankruptcy Chapters Statutory Differences

The differences between who is eligible for what chapter and the cost of filing.

As you can see, most people would probably want to avoid a Chapter 11 based on costs alone.  However, each Chapter of Bankruptcy provides a certain set of benefits:

An attorney can best advise you on the benefits of different bankruptcy Chapters.

Each Chapter of Bankruptcy offers different benefits, but the biggest difference is with the Chapter 7 benefits — often, the benefits offered by other Chapters are not needed in a Chapter 7.

 

So, with all these benefits, what is an attorney analyzing when considering which type of bankruptcy is best?  The answer is: everything about your financial situation, including your income, expenses, goals, and wants.  While this is NOT a substitute for legal advice (because a good attorney also considers the nuances of Bankruptcy law and factors not listed below), some considerations are as follows:

 

An attorney needs to know you and your needs to advise you on what Chapter to file.

Different Chapters of Bankruptcy are for people in varying situations.

Finally, each type of bankruptcy has its downsides.  A bankruptcy attorney will discuss these with you, but some of the basic drawbacks are below:

A good bankruptcy attorney will advise you of these drawbacks.

Each bankruptcy Chapter has its disadvantages.

No amount of charts and blog posts can compensate for the quality advice of a good bankruptcy attorney.  However, even the best attorneys have clients who cannot keep everything in mind.  The purpose of this post is to supplement advice from a qualified bankruptcy attorney, not supplant it.