What Are the Different Types of Bankruptcy?
Going through the bankruptcy process can reduce or eliminate debt and relieve the burden of being chased by creditors. Three main causes of bankruptcy according to the American Bankruptcy Institute are divorce, job loss, and medical bills. There are two main types of bankruptcy one is called Chapter 7 for individuals, and the other is Chapter 13 for some individuals and small businesses. Chapter 7 is often called liquidation, which means that a trustee will sell your assets that are non-exempt and will use that money to pay off debts. Chapter 13 is a payment plan in which both you and the court agree on a payment plan to pay off your debts. Chapter 11 is business bankruptcy.
There are also Chapters 9, 12, and 15. Chapter 9 offers a financially distressed municipality protection from its creditors while it is negotiating a plan to solve its debt situation. Chapter 12 is for financially distressed family farmers and fishermen who can carry out a plan to repay part or all of their debts. Chapter 15 bankruptcy is a set of rules that determine how the United States court system handles foreign bankruptcy proceedings.
Chapter 7 Bankruptcy
Chapter 7 is for those who have credit card debt, medical or personal loan debt. It is also the best for those individuals who don’t want a payment plan for the next 3-5 years. Under court supervision this allows individuals to liquidate or sell their assets and use the money to pay off debt.
It requires a means test, which should show if a person can pay their debts without bankruptcy. You qualify if your income from the last 6 months is less than the state median. Some property and personal items are normally exempt from bankruptcy proceedings such as a person’s home, clothing, car, computers and appliances, or other items required for a job. A second car, a boat, a second home, a coin collection, and excess jewelry are not normally exempt.
Pros
- Creditors are immediately stopped from filing lawsuits, wage garnishments, and conduct nagging phone calls;
- The process, from filing to discharge is quite quick at between 4 and 6 months;
- Most essential property is exempt from being sold;
- The fees are low when filing for Chapter 7 bankruptcy.
Cons
- Tarnishes credit report for 10 years;
- There are some debts that can’t be discharged including alimony and child support, tax liens and student loans,
- If the court finds that your earnings are too much to file for Chapter 7, your case could be converted to Chapter 13 or dismissed.
How Chapter 7 Bankruptcy works
It commences when the debtor files a petition with the bankruptcy court in the area where the individual lives or business is situated. Schedules of assets and liabilities, a schedule of current income and expenditures; a statement of financial affairs; and a schedule of executory contracts and unexpired leases need to be included. Between 21 and 40 days following the petition filing the case trustee will hold a meeting of creditors. The case is referred to the court for the discharging of Chapter 7 bankruptcy.
Further Reading: Chapter 7 Bankruptcy
Chapter 13 Bankruptcy
With this form of bankruptcy, debtors will propose a repayment plan that consists of installments to creditors throughout a period of 3 to 5 years.
Eligibility criteria
The debtor must have a regular source of income which can come from wages, income from self-employment, social security, pension funds, and support provided by family members. The court needs to be convinced that the debtor can adhere to the repayment plan.
Key features
Pros
- You may be able to lengthen the time to make debt payments.
- Decrease the amounts of the payments.
- Give up an item of your property that you're making payments on.
Cons
- Far higher failure rate than Chapter 7.
- High fees and costs.
- Can affect finances.
How it works
- File the Chapter 13 Bankruptcy paperwork.
- Attend the 341 meeting of creditors.
- Start paying the Chapter 13 payments.
Further Reading: Chapter 13 Bankruptcy
Chapter 11 Bankruptcy
Definition and purpose
It creates a plan to repay creditors all or part of what is owed.
Eligibility criteria
This is available to individuals, corporations, partnerships, joint ventures, and limited liability companies.
Key features
The debtor keeps possession while a trustee may continue to operate the business, and may, after court approval, borrow more money.
Pros
- As soon as Chapter 11 is filed creditors can’t take any action including taking over a debtor’s assets.
- A debtor is given time to restructure debt and trigger a repayment plan that can be short or long.
Cons
- If the debtor doesn’t meet its repayment plan, a Chapter 7 bankruptcy could be triggered, so creditors can demand the debtor’s assets.
- It attracts expensive fees.
How it works
A plan of reorganization of debt is proposed and creditors who are affected vote on the plan, then the plan is confirmed by the court if it gets enough votes and the repayment begins.
Chapter 12 Bankruptcy
Definition and purpose
Chapter 12 is for fishermen or family farmers with regular annual incomes. It allows those who face financial problems to propose and initiate a plan to repay all or part of their debts.
Eligibility criteria
The Bankruptcy Code states that only a family farmer or fisherman with a regular annual income is permitted to file a petition under Chapter 12. The total debts (unsecured and secured) must not be more than $2,268,550 (for a family fisherman) or $11,097,350 (for a family farmer).
Key features
The debtor proposes a repayment plan which involves making installments to creditors over 3 years.
Pros
- Lets farmers and fishermen restructure their debts to make them manageable.
- Lets farmers keep their property while paying off their debts.
Cons
- It affects credit scores and the chances to access finance in the future.
Chapter 9 Bankruptcy
Definition and purpose
This offers municipalities who are financially distressed with protection from creditors. It allows the creation of a repayment plan between the municipality and its creditors.
Eligibility criteria
- The municipality needs to be authorized as a debtor by state law.
- The municipality needs to be insolvent, as defined in 11 U.S.C. § 101(32)(C).
- The municipality must want to solve its debt problems.
Key features
The Bankruptcy Code states that the debtor must file a plan that is in the best interest of all creditors and is also feasible.
Pros
The judge cannot force a city to sell its assets.
Cons
- Difficult to access Chapter 9.
- Unsure outcome as it depends on what the bankruptcy judge decides.
- It is expensive.
How it works
Chapter 9 offers to provide a financially distressed municipality protection from creditors while negotiating a plan for relieving it of its debts.
Chapter 15 Bankruptcy
Definition and purpose
Chapter 15 provides a method of handling insolvency cases of debtors in more than one country. It’s a set of rules that determine how the US court system should handle foreign bankruptcy proceedings that involve assets in the U.S.
If you are having a problem with debt repayments, you should find a bankruptcy type that suits your situation. This isn’t always easy, and you should seek professional advice when considering bankruptcy
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Additional Resources
Sources
- Bankruptcy Basics – United States Courts
- Types of Bankruptcies: Which One Is Right For You? – Forbes Advisor
- Bankruptcy – United States Courts
- The 5 Most Common Types of Bankruptcy – Bankrate
- Bankruptcy Explained: Types and How It Works – Investopedia
