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An overview of bankruptcy chapters

On Behalf of | Mar 24, 2022 | Personal Bankruptcy

Bankruptcy is a legal process in Michigan that helps consumers deal with debt. Consumers file bankruptcy for several reasons, but medical debt is the primary reason in the United States. There are several types of bankruptcy that consumers may choose, which have important differences.

Chapter 7 bankruptcy

Consumers may choose from several types of bankruptcy, but they most commonly file Chapter 7 or Chapter 13. Chapter 7 liquidates nonexempt assets, or what courts consider unnecessary, and sells them to pay secured creditors. However, the consumer must pass a means test, which determines if they have enough disposable income to pay debts.

Secured debts are debts that have collateral attached, such as mortgages, which the lender can seize for nonpayment. Unsecured debts, such as past-due utilities and medical debt, typically get discharged within four to six months.

Other types of bankruptcy

Chapter 13 is a debt reorganization plan that allows consumers to pay the debt over three to five years. Consumers devise their own payment plan to submit for approval, but the creditors can object to it. The consumer does not have to sell property or cease business operations as long as they make payments.

Chapter 11 works similarly to Chapter 13 and is available to anyone, but it’s mostly used by large corporations. Unlike Chapter 7 and Chapter 13, the consumer can act as trustee over their case and apply for loans with approval.

Chapter 9 bankruptcy allows municipalities, school districts and counties to file without losing assets while they work out a plan. Chapter 9 requires the entity to be insolvent, or truly unable to pay their debts, and authorized by law to file.

While bankruptcy removes some debt, it doesn’t remove liens. Consumers still must stay current on mortgages and secured debt payments to avoid losing property. Bankruptcy also stays on a credit report for several years, so consumers may want to seek other options first.