Chapter and Verse

Frequently, bankruptcy attorney Cooper Macco hears from someone “caught up in the intricacies of bankruptcy code” and about to lose their home because they filed the wrong way.

“Knowing what chapter is right for you—and what chapter you may be eligible for—is really important before you jump into the bankruptcy world,” Macco says.

Navigating the distinctions can be tricky, especially since the legal issues surrounding each one can vary from one New York jurisdiction to another. But every choice essentially falls into one of two camps: liquidation, in which nonexempt assets are sold to pay creditors; or reorganization, which involves a repayment plan.

The most common type is Chapter 7, generally used by individuals with average income, but occasionally by businesses that are closing their doors for good. Known as the liquidation chapter, Chapter 7 allows filers to relinquish their debt altogether. “Their slate is wiped clean,” says Thomas Frank, a bankruptcy attorney and founder of The Frank Law Firm. “After the discharge order that blocks creditors from pursuing them, you run their credit report and you’re not going to see anything. They call that the fresh start. Chapter 7 is super simple.”

Just because you have assets doesn’t mean you can’t file Chapter 7. “For the most part, when we put our clients into a liquidation, we do so because we know their assets are going to be protected,” Macco says. Protected assets often include a home that they live in, a vehicle, retirement accounts and public benefits like Social Security. “And if they have assets that can’t be protected, we would steer them toward a reorganization.”

That generally means they’d pursue Chapter 13, in which a person agrees to pay back all or a portion of what they owe, over three or five years. In exchange, they keep their assets. “Let’s say you have no credit card debt, but you’re 10 months behind on your mortgage,” says Frank. “Chapter 13 is the perfect chapter for that because you can resolve your debts over the life of the plan.”

He recalls a client from Queens who, during their first meeting, told him, “I have a foreclosure sale on my home in two weeks, and I spoke to two attorneys and they said they can’t stop it.”

Frank stepped in to help him file Chapter 13. “We got the sale stopped, and he saved his family’s home,” Frank says. “Every time I think of that case, it puts a smile on my face.”

Macco has seen similar success stories. “Through Chapter 13, we’re able to get people back on track on defaults in mortgages, save their homes, and shed themselves of unnecessary, unsecured debt like credit cards and medical bills that may have accrued due to loss of income or injury,” he says.

Chapter 11 works a lot like Chapter 13, but for businesses seeking to reorganize, keep operating and repay creditors. According to Frank, this option “provides for the complexities that can come up with businesses.”

If you’re considering filing, talk with an attorney who focuses on bankruptcy—the earlier the better. Be wary of AI advice and so-called debt-relief companies that advertise on late-night TV, attorneys say. “The balance of what can be protected needs to be handled by someone who has an acute awareness of what the exemptions are in your jurisdiction,” says Macco. What’s more, he adds, “Once you’re in bankruptcy, particularly Chapter 7, it’s very hard to get out of it, particularly if the trustee finds an asset they can latch onto.”

It’s up to you to provide the necessary tax returns, pay stubs and other documents to your attorney, and on time. “In bankruptcy cases, the deadlines are unforgiving,” says Frank. As are the consequences for fudging the details. “The most common way you can get in trouble in bankruptcy is if you’re dishonest.”

Above all, remember that bankruptcy offers a fresh start, Macco says. “I understand that people are worried about the stigma, but it’s a mechanism to help you get out of that debt when you are, possibly, in a situation where you’re just barely getting by. There may be stigma, but it’s not like you get branded with a scarlet letter.”