No one likes discussing bankruptcy in any of its various forms, but knowing and understanding bankruptcy options can help you make the best financial decision for your current situation.
Let’s tackle the basics first.
Bankruptcy is a legal status of a person or business who cannot repay debts owed to creditors.
The central objective of the federal bankruptcy law enacted by Congress is to offer debtors a financial “fresh start” from oppressive and burdensome debts.
The Many Types of Bankruptcy
Chapter 7 – This is the quickest and easiest form of bankruptcy available; and it’s what most people think of when they hear “filing for bankruptcy”. And since the BAPCPA Act of 2005, you have to qualify for Chapter 7 with the Bankruptcy Means Test.
Chapter 7 Bankruptcy is available to individuals and businesses and involves the liquidation of assets (and ceasing of operation for businesses). The debtor sells off all non-exempt assets so that a portion of the debts can be repaid. The remaining debt that cannot be repaid after liquidation is discharged.
Chapter 9 – This is a Municipality Bankruptcy that exclusively handles the restructure and resolution of a town’s debt. One of the most famous Chapter 9 filings was in 1994 when Orange County, California used bankruptcy to adjust its debts.
Chapter 11 – A form of corporate financial reorganization, Chapter 11 is one of the most complex and oft heard about types of bankruptcy. Chapter 11 is used primarily by business debtors, but is occasionally employed by individuals with substantial debts and assets.
Typically, the debtor maintains ownership of all assets and is allowed to continue operating while adhering to a court-mandated debt repayment plan. Filing for Chapter 11 gives the debtor legal protection from creditors while they attempt to reorganize and become more financially stable.
Chapter 12 – This type of bankruptcy offers rehabilitation opportunities exclusively to farmers and fishermen. Its structure is similar to Chapter 13 and was initiated as a response to tightening agricultural credit in the 1980s.
Chapter 13 – This is similar to Chapter 11, but designed for individuals with a regular source of income. Under Chapter 13 Bankruptcy, the individual debtor must settle all or part of the debt owed within a 3-5 year period. Think of it like a government form of debt consolidation. Unlike Chapter 7, Chapter 13 bankruptcy allows the debtor to maintain ownership of assets.
Chapter 15 – This type of filing is for Jurisdictional Bankruptcy which allows for cooperation between foreign courts, US courts, and other foreign authorities involved in cross-border corporate bankruptcy cases. Chapter 15 provides a vehicle for dealing with international debtors.
The three most common types of bankruptcy are Chapter 7, Chapter 11, and Chapter 13. There were 1,593,081 bankruptcy filings in the United States in 2010.
It’s never a good situation when you can’t repay the debts that you owe.
But hopefully, with a good understanding of available options, you can make the best decision for your financial future and get back on track to responsible and successful financial living.
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