Choosing a Bankruptcy Chapter

Federal laws authorize and govern bankruptcy cases throughout the United States.  Congress intentionally designed the bankruptcy process to give all Americans, like us here in Utah, an opportunity to get a fresh start free from debt. While choosing the right chapter of bankruptcy can definitely help people out of a jam, the bankruptcy laws are not exactly charity. Bankruptcy laws were designed to encourage the entrepreneurial risk taking and freedom that the U.S. economy depends on for growth while balancing the rights of creditors.  Congress recognizes that sound economic policies encouraging a healthy amount of risk taking must include a reasonable path to financial redemption.

For people like you and me, there are two main types (or chapters) of bankruptcy. First, in a Chapter 7 a person is simply released from their dischargeable debts in exchange for liquidating valuable assets. Under Chapter 13 you can reduce the size of your debts to a manageable amount and then pay them under an approved payment plan for three to five years.  Chapter 7 bankruptcies represent about two-thirds of all bankruptcy cases filed in Utah, with Chapter 13 cases making up the other third. More specialized and complicated cases under Chapters 11 or 12 together make up less than 0.25% of all bankruptcy cases filed in the State of Utah, with fewer than 50 such cases filed in a normal year.

So, why might you choose one chapter over another?

A Chapter 7 bankruptcy is the “fresh start” commonly referred to when you hear people talking about bankruptcy, as you can generally wipe the slate clean relatively quickly. People generally choose Chapter 7 when they have little to lose from the liquidation process. Consequently, a significant portion of Chapter 7 filers lose nothing more than a tax refund. This can happen because Congress and the Utah legislature have made public policy choices that have placed certain assets beyond the reach of your creditors (e.g., retirement plans, home appliances, etc.). These policies are called “Exemption Laws.” We can help you determine whether a Chapter 7 bankruptcy is right for your situation.

If you can afford to make payments on your debt, you might be forced to propose a payment plan under Chapter 13. Other situations where people might choose Chapter 13 include:

  • anytime a liquidation under Chapter 7 looks too painful
  • when the financing for the car you own is overly burdensome on your budget
  • you need help to catch up on delinquent student loans and avoid collection attempts
  • people who owe back taxes can use a Chapter 13 payment plan to halt IRS garnishments and other collection efforts
  • small business owners often prefer Chapter 13 so their business assets aren’t exposed to liquidation

People can feel embarrassed or as if there’s no hope when they find themselves in financial straits.  BUT THERE IS HOPE!  Bankruptcy sounds scary, and it is not something to take lightly, but it is not as scary as you might think.  You owe it to yourself to at least know your options.  Where you find yourself years from now will be directed by decisions you make today.

Choosing a bankruptcy chapter and figuring out where you fit in the bankruptcy process depends primarily on your debts, assets, income, and expenses.  We can tell you where you stand.