Understanding Bankruptcy: Choosing The Right Chapter

For many people, filing for bankruptcy is an opportunity to clear their debt and get a fresh start. Although this sounds like a great plan, people must understand bankruptcy before filing. The filing process is lengthy, complicated, and has repercussions on your credit score for up to ten years. You need to choose the bankruptcy chapter that is right for you and complies with the laws and regulations in your state.

This article will explain each bankruptcy chapter, allowing you to make an informed decision and combat your financial situation.

What is Bankruptcy?

Bankruptcy is a legal process that allows people and businesses to diminish or reorganize their debts and gain a fresh start. State and federal laws regulate the process, and it can be complicated. Consult with a lawyer to be as successful as possible when starting the bankruptcy process.

Understanding the Chapters

When filing for bankruptcy, you must choose which chapter to file under. This decision is based on your financial situation and determines how much assistance and relief you will be provided. Below are the most common chapters, but if you do not believe any of these work for you, consult a lawyer to discuss other options.

Chapter 7

Chapter 7 is the most common type of bankruptcy. This chapter requires you to liquidate your assets to discharge your debts, meaning you are no longer legally responsible. It is important to note that this chapter will remove most of your debt, but you may lose your tangible assets in the process.

To qualify for Chapter 7, you must pass a means test provided by the state, proving your income is low enough to follow through with this process.

Chapter 13

Chapter 13 is another common type of bankruptcy. Under this chapter, the court will reconstruct your debt repayment plan based on your income, and you will be required to pay through this. Most payment plans will take between three to five years to complete.

To qualify for Chapter 13, your income must be above the median in your state. You must also have steady earnings, and your debt must be below what the Bankruptcy Code outlines.

Chapter 11

Businesses usually file under Chapter 11, but this category may also work for individuals. Like Chapter 13, individuals will create a payment plan to repay their debt for up to five years. The advantage of this method is that it prioritizes the continuation of an operation while repaying debt.

To qualify for Chapter 11, your income must be above the median in your state.

Chapter 12

Family farmers and fishermen will want to file under Chapter 12. Regulations are similar to those of Chapter 13 but are better suited for the unique financial situation of this niche set of debtors. It will reorganize debt and business affairs to enhance business operations and allow for a more extended repayment period.

Chapter 12 has relaxed eligibility requirements that may vary per situation.

Chapter 15

Chapter 15 deals with cross-border insolvency cases, meaning cases where the debtor has investments or debts in more than one country. This chapter provides for a collaborative process between the countries involved to ensure that the debtor's assets are adequately protected and that the rights of all creditors are respected.

The eligibility criteria for Chapter 15 is having debt and investments in multiple countries.

Chapter 9

Chapter 9 is secured for municipalities, such as cities, towns, or school districts, to reorganize their debt. The debt is usually combated with extended repayment time, reducing interest, or obtaining new loans.

To be eligible for Chapter 9, you must be a state-defined municipal.


Although bankruptcy may seem like a way to remove all financial burdens, there are limitations.

Bankruptcy only allows for the discharge of certain debts, and it is important to consult the Bankruptcy Code to ensure your debt is eligible. Similarly, specific types of properties are except the bankruptcy estate.

Consulting with a lawyer to ensure these limitations will not affect your bankruptcy file is essential for a successful case.

Bottom Line

If you are burdened with debt, bankruptcy might be the right choice for you. Understanding the different chapters will set you on the right path to overcoming your financial hardship in no time.

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