What Form of Bankruptcy Is Better for My Financial Situation?
For those who feel overwhelmed by their debts with no clear solution to get out of them, bankruptcy can be their best option. Bankruptcy allows you to have a portion of your debt forgiven (in most instances) while also allowing you to pay down your debts to the extent possible. Importantly, bankruptcy also provides legal protection from creditors, allowing you to prevent certain actions like wage garnishment or (in some cases) foreclosure.
There are multiple forms of bankruptcy available. Choosing the right one for you involves looking at your current financial situation, including assets, income, debts, and whether or not those debts are secured. Depending on your situation, certain forms of bankruptcy may not even be available.
Deciding on the right form of bankruptcy to file requires some serious consideration. It can greatly benefit you to make an inventory of assets, income, and debts and then speak to an experienced New Mexico bankruptcy lawyer. An experienced bankruptcy attorney can help advise you as to the best type of bankruptcy to file under for your situation, and they may even reveal alternatives to bankruptcy you had not yet considered.
Bankruptcy filings are named after the chapter of the U.S. Bankruptcy Code in which they appear. To help you better understand what type of bankruptcy may be best for you, look at all of the options below:
- Chapter 7
- Chapter 13
- Chapter 11
- Chapter 12
Chapter 7 Bankruptcy
- Also sometimes called: Liquidation bankruptcy
- In a nutshell: All non-exempt property is liquidated to pay off debts, and the remainder of unsecured debt is (typically) discharged
- Best for: Individuals with moderate to no income and unsecured debts below 394k
- Not best for: Individuals earning above medium income or with very high volumes of debt
Chapter 7 bankruptcy exists to help individuals with excess debts receive relief from collection actions while simultaneously paying down as much of their debt as possible. While many who have heard about Chapter 7 think that they will lose everything, the reality is that much of your personal property and financial savings could be exempt.
All non-exempt property is liquidated by the assigned case trustee. The proceeds from these sales or used to pay down a portion of the debt. Once bankruptcy procedures are complete, any remaining unsecured debts are likely to be “discharged”, meaning you are no longer legally obligated to repay them. Certain debts are ineligible to be discharged, however, including secured debts, student loans, child support, alimony, back taxes, and more.
Importantly, Chapter 7 bankruptcy is only available to those who can pass the “means test.” This test basically seeks to prove whether or not you are truly incapable of paying off your debts given your current means. It primarily consists of testing to see if you fall below or above the median income for your region.
There are also limits to the volume of debt you can hold in order to be eligible to file Chapter 7. The current debt limit as of 2021 is $1,184,200 in secured debt (debts for a specific item or collateral, such as a home mortgage) and $394,725 in unsecured debt (credit cards, etc.).
Finally, once you file for Chapter 7 bankruptcy, you cannot do so again for at least 8 years.
If you aren’t sure if you qualify for Chapter 7 bankruptcy, don’t assume that the numbers above involve a simple calculation. There may be specific deductions or exemptions available, depending on your circumstances. Speak to a Chapter 7 bankruptcy lawyer in New Mexico to learn more.
Those who aren’t eligible for Chapter 7 bankruptcy can still file for Chapter 13, in most cases.
Chapter 13 Bankruptcy
- Also sometimes called: Wage earner’s bankruptcy
- In a nutshell: Establish a reasonable monthly payment plan to pay off creditors, usually over the next 3-5 years; some remaining debts may be eligible for discharge.
- Best for: Individuals who do not meet Chapter 7 eligibility criteria or who want the flexibility to repay debt without having to liquidate assets
- Not best for: Individuals seeking to discharge as much debt as possible and who meet Chapter 7 eligibility criteria
Chapter 13 bankruptcy is intended for those who earn a regular income but who still find themselves overwhelmed by their debts. To put the process in extremely simple terms: Chapter 13 allows you to stop making payments through the procedures your creditors provide, and instead you will make payments according to a bankruptcy-court-approved plan. The plan created during bankruptcy is more likely to fit within your budget. Further, filing for Chapter 13 can allow you to put a temporary stop to wage garnishment, foreclosure, and other extreme collection actions so long as the debt is being repaid.
Once you have paid off a significant portion of your debt, it is possible that you can have the remainder approved to be discharged by the judge presiding over your case.
Like Chapter 7, there are limits on the amount of debt you are able to hold in order to be eligible for Chapter 13 bankruptcy, although these limits will be higher. As of 2019 rule changes, the current limits are $1,257,850 for secured debts and $419,275 for unsecured debts. Again, there may be deductions available to help you reach this limit, in some cases.
Overall, Chapter 13 bankruptcy offers two main advantages over Chapter 7: there is no means test, so almost anyone who meets the debt limit can use it, and there is a shorter window between filing periods, meaning you could in theory file for Chapter 13 more frequently. If you did not have any debt discharged at the conclusion of your Chapter 13 proceeding, you could technically file again in as little as two years. You may have to wait from 4 to 6 years if you had debt discharged in either Chapter 7 or Chapter 13 proceedings, previously.
Some also allege that discharging debts through Chapter 13 will have a lower impact on your ability to obtain credit, but Chapter 7 and Chapter 13 impact your credit score the same. It is up to individual lenders to decide if filing for Chapter 13 makes you a lower risk compared to individuals who file Chapter 7.
Chapter 11 Bankruptcy
- Also sometimes called: Business reorganization bankruptcy
- In a nutshell: Obtain a halt to collection actions while you restructure your business/financial operations and liquidate some of your current assets; this Chapter can be used by businesses as well as individuals with significant real estate holdings or other intermingled business/personal finances.
- Best for: Businesses and certain individuals who feel they will be able to stay solvent after reorganization
- Not best for: Businesses very likely to close, individuals without significant income sources derived from personal investments
Chapter 11 bankruptcy is typically used by corporations and partnerships. In some cases, sole proprietorships may wish to file for Chapter 11, as might certain individuals with significant amounts of property or other holdings that can act similarly to business income.
When filing for Chapter 11, the business is granted a temporary stay from collections while they reorganize and sell off unneeded assets. An owner of multiple retail stores might shut down certain locations, for example. Someone with a complicated business venture involving multiple business lines may similarly shut down many of those operations in order to focus on a few main revenue streams.
Chapter 11 proceedings are almost always complex, and they can involve significant expenses. Any reorganization plans must be made in the best interests of the creditors, so there may be some back and forth involved in deciding the best way to proceed.
Sadly, many businesses that file for Chapter 11 still go insolvent a few years after reorganization. In these cases, the business owner(s) may have wished to reflect longer on the future viability of their business and whether or not closing and full liquidation or a sell-off would have been a better alternative. Naturally, everything is clearer in hindsight, but the truth remains that some businesses and individuals considering Chapter 11 should take an honest look at their future prospects before attempting to keep the business afloat.
Chapter 12 Bankruptcy
- Also sometimes called: Farmer’s bankruptcy
- In a nutshell: Nearly identical to Chapter 13 bankruptcy but with higher debt limits, Chapter 12 is reserved for farmers, fishermen, and others who depend on their property for their livelihood.
- Best for: Farmers, fishermen, those involved in agriculture
- Not best for: Anyone whose occupation/business doesn’t qualify
This form of bankruptcy is fairly self-explanatory. It uses much of the same rules as Chapter 13 but affords higher debt limits and other flexibilities. The primary purpose of Chapter 12 is for an agricultural business to avoid having to liquidate assets or property that would, effectively, put them out of business.
Decide on the Chapter That Works Best for You With Help From New Mexico Bankruptcy Lawyers
There are no easy answers as to the best form of bankruptcy to file. Bankruptcy cases are often complicated and lengthy, especially when they involve businesses or individuals with mixed business/personal finances.
Speaking with an experienced New Mexico bankruptcy lawyer is the only way to fully analyze your situation, consider all options, and then form a plan for filing that maximizes the chances of meeting your goals.
Start the process today when you call New Mexico Financial & Family Law at (505) 503-1637 or contact us online to schedule your confidential, no-obligation case review.