Bankruptcy Basics: Exploring the Six Different Types of Bankruptcy
The average person can be confused about what bankruptcy is and how it works, but the concept is not as complex as it may seem. Bankruptcy is a generalized term for a federal court procedure that helps consumers and businesses get rid of their debts and repay their creditors. If you can prove you are entitled to it, the bankruptcy court will protect you during your bankruptcy proceeding.
In general, bankruptcies can be categorized into two types:
Among the different types of bankruptcies, Chapter 7 and Chapter 13 proceedings are the most common for individuals and businesses. Chapter 7 bankruptcies normally fall in the liquidation category, meaning your property could be sold to pay back your debts.
Chapter 11, 12, and 13 bankruptcies generally fall under the reorganization category, meaning you will probably be able to keep your property. Still, you must submit and stick to a plan allowing you to repay some or all of your debts within three to five years.
The type of bankruptcy for which you should file depends on the types of debts you have, the amount of your overall debt, your ability to pay, and other factors. Read on to learn about the different types of bankruptcies that United States courts handle.
Chapter 7 Bankruptcy
Both individuals and businesses are allowed to file a Chapter 7 bankruptcy case. This bankruptcy process typically lasts between three and six months.
After your bankruptcy filing, a bankruptcy trustee will administer your case. You will also be required to complete credit counseling.
Some of your property may be seized and sold to pay off some or all of your debts. This is known as liquidation of property.
As a benefit of this type of bankruptcy proceeding, some unsecured debts (not guaranteed by collateral) will result in a bankruptcy discharge. Note, though, that a discharge will not get rid of liens.
A Chapter 7 bankruptcy will typically eliminate debts such as medical bills and credit card debt. In addition, certain types of property cannot be sold to pay off your debts. These exemptions will vary depending on your state.
Secured debts are treated differently from unsecured debts in a Chapter 7 bankruptcy proceeding. You, the debtor, have three choices:
- Allow the creditor to repossess the property that secures the debt.
- Continue to make payments on your debt to the creditor.
- Pay the creditor a sum equal to the replacement value of the property that secures the debt.
In addition, some types of secured debts can be wiped out during a Chapter 7 bankruptcy proceeding, giving you a fresh start.
Before you can file for Chapter 7 bankruptcy, you must be able to show that you are eligible. For Chapter 7 eligibility, you cannot make enough money to be able to fund a Chapter 13 bankruptcy repayment plan. There are also other requirements, including passing a means test.
While credit card debt, unsecured loans, and other debts can be forgiven in Chapter 7, obligations including court-ordered child support, student loans, and alimony payments cannot be wiped out. See Debts That Remain After a Chapter 7 Discharge for more information.
Chapter 9 Bankruptcy
A Chapter 9 bankruptcy is for municipalities, school districts, or cities. It protects municipalities from creditors while negotiating a plan to resolve the existing debt. States, however, cannot file for a Chapter 11 bankruptcy.
This type of bankruptcy may negatively affect public employees and other stakeholders.
Chapter 11 Bankruptcy
Bankruptcy laws state that struggling businesses normally file for Chapter 11 bankruptcy. This type of bankruptcy usually involves partnerships and corporations. Filing for Chapter 11 allows businesses to get their affairs in order and pay off their debts.
Some individuals also file a Chapter 11 bankruptcy petition when they are not eligible for Chapter 13 bankruptcy or own large amounts of nonexempt property (such as several homes). However, Chapter 11 can be much more expensive and time-consuming than Chapter 13.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy is very much like Chapter 13 bankruptcy, except it is only available to family farmers or those with a fishing operation. For this type of bankruptcy, you will need to show proof of:
- Your business lenders
- The amount of each claim
- Your total annual income and frequency of your income (for seasonal operations)
- Your property and assets
- Your expenses per month (e.g., utilities for buildings, taxes, transportation of workers or products, medicine and food for fish or animals, fertilizer, etc.)
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also known as the wage earner bankruptcy proceeding. According to the Bankruptcy Code, only people with a reliable source of income are allowed to file for Chapter 13 bankruptcy.
The legal process for Chapter 13 involves working with the court to devise a payment plan and commit to monthly payments over the next three to five years. The amount you will need to pay is based on your income, how much debt you owe, and how much the creditors of your unsecured loans would have received if you had filed under Chapter 7 instead of Chapter 13.
To be eligible to file for Chapter 13 bankruptcy, you must be able to show that your debt is under the limits for filing. If you have more than either of these amounts, you may be unable to file for Chapter 13 bankruptcy protection.
Chapter 13 bankruptcy may allow you to repay secured debts, even if you are behind on payments, without having the property that secures the debt be repossessed. This can help save you from foreclosure or car repossession. You may be able to put your past-due payments into your debt repayment plan and pay them off over a period of years. This may bring you the peace of mind and debt relief you need.
Chapter 15 Bankruptcy
Chapter 15 bankruptcy is for foreign courts and U.S. courts. It allows them to communicate and cooperate if foreign bankruptcy filings somehow affect financial interests in the United States. This is the only type of bankruptcy that does not serve the purpose of discharge or reorganization. Instead, these rules determine how to handle foreign bankruptcy proceedings involving U.S. assets.
Potential Alternatives to Filing for Bankruptcy
Some negative effects of a bankruptcy filing are that it is not free and that the bankruptcy will stay on the filer's credit report for 10 years. Thus, some people seek alternatives to filing bankruptcy if they have the means. A few alternatives to consider include:
- Agreeing to a debt settlement
- Asking for a loan modification that may lower your interest rates
- Taking out a debt consolidation loan
- Negotiating with creditors on your own
Contact a Bankruptcy Lawyer for More Information
Unsure if you qualify for Chapter 7 or Chapter 13 bankruptcy? Maybe you need help navigating bankruptcy forms, have debt management questions, or seek general legal advice. Contact a bankruptcy attorney near you for guidance.