Types of Bankruptcies

Although you commonly hear about only two types of bankruptcies — Chapter 7 and Chapter 13, there are actually six. They are defined as “chapters” because it refers to the chapter section of the U.S. Bankruptcy Code. All are designed to help absolve you of large amounts of debt. But each one has specifics that differentiate them from each other.

The six different types of bankruptcy include:

•    Chapter 7: Liquidation
•    Chapter 13: Repayment Plan
•    Chapter 11: Large Reorganization
•    Chapter 12: Family Farmers
•    Chapter 15: Used in Foreign Cases
•    Chapter 9: Municipalities

This is the most common type of bankruptcy. When you file for a Chapter 7 Bankruptcy, a court-appointed trustee will examine a list of all your assets and handle the sale of them. In turn the proceeds will be used to pay off your creditors. Some debt, typically unsecured debt such as credit cards or medical debt, is eliminated. However taxes owed to the government or student loan debt must be paid.

In a Chapter 7 Bankruptcy, and depending on the state you live in, not all assets are sold. You are normally allowed to keep your home, car, and any funds in a retirement account. However, it should be noted that if your home is already in foreclosure, a bankruptcy filing wouldn’t stop it. It can delay the foreclosure proceedings long enough hat you may be able to work with the bank and get out of foreclosure.

Hanging On to Assets

You can also keep other assets if at some point you find a way to pay your debts. But typically, a Chapter 7 Bankruptcy is warranted when a person doesn’t possess many assets of reasonable value anyway, and so the potential for a loss of property isn’t always that great.

When you file Chapter 7 Bankruptcy, a court will decide if you are approved based on what they call a means test. This is a formula that compares your income to the state average. Based on your disposable income, the court will determine whether or not you have the means to pay back at least a significant amount of your debts. If you are found unable to do so, you will likely be qualified for Chapter 7.

When you file Chapter 7, the bankruptcy will remain on your credit report for 10 years and you will be unable to file a second bankruptcy for a period of 8 years.

This type of bankruptcy is designed to reorganize your debt rather than absolve you of it. Essentially, you will pay some of your debts, and some debts will be forgiven. People often file this type of bankruptcy when they don’t want to give up any of their assets or they aren’t able to qualify for Chapter 7 because their income is too high.

Cap On Debt

You can only file Chapter 13 if your debts do not exceed a certain amount, which changes periodically. When you file this type of bankruptcy you will be responsible for paying off a portion of the debt within 3-5 years.

This type of bankruptcy is mainly for businesses and corporations that are having trouble paying their operating costs. The bankruptcy gives the business a chance to reorganize. So long as the plan meets with the approval of both the court and the creditors.

This type of bankruptcy is similar to Chapter 13 but mainly applies to family fishermen and family farms. The bankruptcy enables these individuals to keep their property and equipment instead of losing it to a foreclosure.

If you have debts in both the United States and another country then Chapter 15 would be a suitable bankruptcy option. Such bankruptcy filings are very rare, however.

This type of bankruptcy only applies to towns and cities that are in debt. This can occur often in smaller towns that are reliant on one or two factories that may close. In turn, causing people to move away to find work in other areas. The bankruptcy filing enables town to continue to operate while a repayment plan is devised to pay creditors.

You should now know which type of bankruptcy is the right option for you, but before filing, it would be wise to speak with a financial advisor or a reputable debt consolidation expert to learn everything you can.

Bottom Line

You can also speak with a bankruptcy lawyer to learn more about filing for bankruptcy so that you can make an informed decision. There are often other alternatives to bankruptcy that may be more viable and make less of a financial impact on both your credit and your assets.

The most important thing to remember is that you must make sure the necessities will be covered regardless of which option you choose. So long as you have food, shelter, transportation, and utilities, you will be able to survive a bankruptcy and take the necessary steps to improve your financial future. If you’re still uncertain about bankruptcy, you may want to think about debt consolidation or debt relief.