Chapters of Bankruptcy Explained


If you are going to dream, dream big. And from time to time, risk big. There is nothing quite like the feeling of having a big risk pay off. Unfortunately, that is not the only possible outcome. The reason it is called a risk is to acknowledge the greater possibility of failure. Big risks are more likely to lead to big failures than big successes.

In the event that one of those failures is in your near future, here are a few things you need to know about bankruptcy:

It Doesn’t Have to Be a Dream Killer

When done right, bankruptcy is not the death of dreams. More often, it is the salvation of dreams. Having no bankruptcy as an option would be the death of dreams. Here are some common misconceptions about bankruptcy:

  • Creditors will take everything
  • Bankruptcy will prevent any credit score improvement for ten years
  • Getting a loan or mortgage after bankruptcy will be impossible
  • Bankruptcy is for losers
  • A consumer can only file for bankruptcy once

Some words elicit a visceral reaction due to the negative associations they have. Such words as, court-martial, foreclosure, and bankruptcy send shivers up our collective spine. But bankruptcy should not be in that list. Bankruptcy is not loss, but the prevention of loss. Even the most severe chapter can breathe new life into a hopeless situation.

There’s More than One Kind

According to How Stuff Works:

In Title 11 of the United States Code (the Federal Bankruptcy Code), there are four bankruptcy filings:

    • Chapter 7 – Liquidation
    • Chapter 11 – Reorganization
    • Chapter 12 – Adjustment of Debts of a Family Farmer with Regular Annual Income
    • Chapter 13 – Adjustment of Debts of an Individual with Regular Income

Chapters 12 and 13 are practically the same. One is for family farmers. And there is a difference in how much you have in assets. This is the good news bankruptcy. You get to keep all your assets. You are basically negotiating a greatly reduced balance, with an affordable fee schedule. You might have to temporarily scale your ambitions back a little. But you do not have to bring your dreams to a halt. Chapter 11 is mostly for large corporations that have to reorg.

Chapter 7 is the one everyone fears. It is also believed to be the most common. This is what happens when your dreams hit the proverbial fan. You double mortgaged your house to support your espresso bar. That was a bad move. Too late now. You are staring down the barrel of a foreclosure (another one of those ugly words).

However, chapter 7 can be incredibly beneficial, as it helps stop the following actions from taking place:

  • Bank levies
  • Creditor/debt collector harassment
  • Evictions
  • Foreclosures
  • Lawsuits
  • Public benefit overpayments collections
  • Repossessions
  • Tax collection (depends on type of tax)
  • Utility disconnections
  • Wage garnishments

That gold Apple Watch Edition with the solid gold link bracelet will likely have to go back. That was another really bad idea. It is very important you do not compound that error by accepting the bad credit offers soon to follow.

Wait for the Good Credit

If you think that your chances of credit ended with the bankruptcy filing, you couldn’t be more wrong. You’ve just become a high-profile targ… I mean, highly valued prospect for sub-prime lenders. Whereas before the bankruptcy, you were getting bills in the mail, immediately after, you will be getting credit card offers. You will also get offers for auto financing, and just about anything else you really can’t afford.

This is a trap into which far too many people fall. Interest rates are astronomical. And your monthly payments will break you just as surely as your recently discharged debt. Be patient. Pay your bills on time. And wait for the good credit offers to come. Let the vultures feast on someone else’s misfortune. You just got a fresh start. Don’t mess it up with bad credit deals.

If you think you might be a candidate for bankruptcy, don’t try to do it yourself. See an attorney who specializes in this legal procedure.

Leave a Reply