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Bankruptcy Filing Chapters: Which is Right for Your Situation?

While the idea of “filing for bankruptcy” has somewhat of a terrifying vibe to it, in a legal context it is essentially an administrative process that allows an individual or businesses to reorganize their unsustainable debt profile in a structured, standardized, transparent and legally appropriate manner.

At the same time, it enables many creditors get paid some of what they are owed, instead of most of them (if not all of them) not getting paid at all. Saying that “everyone wins” is an exaggeration, but it is fair to say that for both parties – debtors and creditors – bankruptcy is certainly not the worst-case scenario.

If you are considering filing for bankruptcy and are not sure where to begin, below are some common scenarios along with their associated bankruptcy filing chapter. While this information is not meant to provide you with specific legal advice — only a qualified and certified bankruptcy lawyer can do that for you — it can point you in the right direction, and familiarize you with what the road ahead might look like.

Scenario #1: You are overwhelmed with unsustainable personal debt, and in addition to piling on additional interest and fees, your creditors are threatening legal action.

Likely Bankruptcy Filing Chapter: You will most likely file for Chapter 7 bankruptcy, which is also known as “liquidation bankruptcy”. The court will work with you to sell any non-exempt assets, which will be used to eliminate unsecured debt such as credit cards, personal loans, medical bills, etc.

Scenario #2: You own a business, and despite your best efforts and requests for extensions from suppliers, vendors, property managers and any other debtors, you can no longer service your mounting debt load.

Likely Bankruptcy Filing Chapter: You will most likely file for Chapter 11 bankruptcy, which will allow you and the rest of your management team to continue operating the business, while the court works with you to restructure your debt load. In most cases, you will not have to make dividend, principal or interest payments during the process (which is called “debtor in possession” or DIP).

Scenario #3: You have unsustainable debt, but because your own property or have disposal income, the court will not allow you to file for Chapter 7 bankruptcy.

Likely Bankruptcy Filing Chapter: You will likely file for Chapter 13 bankruptcy, which affords you certain protections as the court works with you to reorganize your debt. In most cases, only some debt is re-organized or reduced, while other debt must continue to be paid on time and in full.

Again, this is just a snapshot of common scenarios and the most likely bankruptcy chapter filing option. Your bankruptcy lawyer will provide you with advice and guidance that is specific to your situation, and that is in your best interest.

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