what types of bankruptcies are there

What Types of Bankruptcies Are There?

Were you aware that there are different types of bankruptcies depending on your financial situation? 

When your position appears hopeless, bankruptcy may appear to be your only option. We understand that you may be afraid and feel pushed into a corner; however, bankruptcy is not a choice to be taken lightly. It is critical to understand what bankruptcy is and the many types of bankruptcy so that you can choose the best option possible for your case.

What Is Bankruptcy?

Bankruptcy is much more severe in real life than just a method to lose a game of Monopoly: The different types of bankruptcies occur when a debtor appears before the bankruptcy courts and informs them that they are unable to pay your bills. Next, based on the circumstances, bankruptcy allows the courts to either cancel the debts of the debtor or devise a repayment plan for them depending on their income and assets. Individuals file for bankruptcy for a variety of reasons, including job loss, medical emergencies, divorce, and death in the family. In reality, in 2018 alone, almost 730,000 non-business bankruptcy petitions were filed. 

However, bankruptcy is a serious life event that has ramifications beyond the pocketbook of a debtor. It can track you down while you are applying for jobs, buying a property, or starting a business. Despite the fact that it may appear to be a “new beginning,” bankruptcy just addresses the symptoms, not the root of the issue.

Student loans, government obligations (fines, taxes, or penalties), reaffirmed debt (when you commit to the terms of a current loan), child support, and alimony are all excluded from bankruptcy. Hence, if those are your sole debts, bankruptcy is not the best option for you. When it comes to child support and the other above-mentioned debts, it is best to consult an attorney.

What Are the Common Types of Bankruptcies?

Despite the fact that the fundamental purpose of bankruptcy is to eliminate debt, not all bankruptcies are the same. There are actually six main types of bankruptcies:

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

You might be feeling slightly overwhelmed after looking at this list of the different types of bankruptcies. That is okay. You are almost certainly only going to be working with the two most popular types of personal bankruptcies: Chapter 7 and Chapter 13. (A chapter simply refers to the portion of the United States Bankruptcy Code in which the law is found.) However, let us go over each type so you are aware of the possibilities.

Liquidation – Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as straight bankruptcy or liquidation, is the most prevalent type of personal bankruptcy. The liquidation (selling) of your assets (everything you own that has worth) to pay off any creditors is overseen by a court-appointed trustee (the parties you owe money to). Any unsecured debt (such as credit cards or medical expenses) is usually forgiven. However, as previously stated, this does not include debts that are not forgiven by bankruptcy, for example, taxes and student loans.

Furthermore, based on which state you reside in, the courts may not order you to sell certain items; for example, most people can keep their homes, cars, and retirement savings if they file for Chapter 7 bankruptcy; however, nothing is guaranteed. A foreclosure cannot be stopped with Chapter 7 bankruptcy, but it can be postponed. Reaffirming the secured or unsecured debt, which involves recommitting to the loan agreement and continuing to make payments, is the only way of keeping the items you still owe money on. However, the majority of Chapter 7 bankruptcies are no-asset cases, which implies there is no property worth selling.

Only if the court determines that you do not earn enough money to repay your debts may you petition for Chapter 7 bankruptcy. This judgment is based on a means test, which examines your financial accounts and compares your revenue to the state average to determine whether you have enough income (or the ability) to pay back a reasonable amount of what you owe to all creditors. If your revenue is too low, you may be eligible for Chapter 7 bankruptcy.

Remember that filing for bankruptcy under Chapter 7 bankruptcy means you are required to attend a creditors’ meeting, where those who owe you money can interrogate you about your finances and debts. That sounds about as entertaining as it gets. A Chapter 7 bankruptcy appears on your credit report for 10 years, and you are not allowed to file again for another eight years.

Municipalities – Chapter 9 Bankruptcy

An alternative repayment strategy is Chapter 9 bankruptcy, which allows cities, towns, school districts, and other entities to reorganize and repay their debts. While finding a situation where parties file chapter 9 bankruptcy is rare, it is essential that people still know it is an option.

Large Reorganization – Chapter 11 Bankruptcy

Chapter 11 bankruptcy is most commonly used to reorganize a corporation or business. Companies must devise a strategy for how they are going to continue to operate while paying off any debt, which must be approved by both the creditors and the court. Some people, such as real estate investors, can choose to file under Chapter 11 bankruptcy if they have too much debt to apply for Chapter 13 bankruptcy but have a great deal of high-value assets and properties. You are probably not going to tamper with this option unless you are a celebrity or a professional athlete.

Family Farmers – Chapter 12 Bankruptcy

Chapter 12 is an option that consists of a repayment arrangement that allows family farmers and fishermen to avoid having to sell everything they own or having their property foreclosed on. While Chapter 12 bankruptcy showcases similarities to Chapter 13 bankruptcy, chapter 12 is more versatile and has larger debt limits.

Repayment Plan and Reorganization – Chapter 13 Bankruptcy

While Chapter 7 bankruptcy generally results in debt forgiveness, Chapter 13 bankruptcy essentially reorganizes your debt. A monthly payment plan is approved by the court, allowing you to pay back a percentage of the unsecured debt and all of the secured debt over the course of three to five years. The amount of monthly payments is determined by your income and the amount of debt you owe. However, the bankruptcy court has the authority to place you on a strict budget and monitor all of your expenditures, which is not so fun.

Unlike Chapter 7, this type of bankruptcy allows you to maintain your assets while catching up on non-bankruptcy debts. Chapter 13 bankruptcy can also help you avoid foreclosure by allowing you to catch up on your mortgage payments.

Anyone who owes less than $419,275 in unsecured debt, as well as less than $1,257,850.3 in secured debt, can petition for Chapter 13 bankruptcy. In addition, you must keep up with any tax filings. Individuals should also be aware that a Chapter 13 bankruptcy appears on a credit report for seven years, and you are not able to apply for another one until two years have passed.

Used in Foreign Cases – Chapter 15 Bankruptcy

Chapter 15 of the United States Bankruptcy Code deals with international bankruptcy concerns and enables foreign debtors admission to bankruptcy courts in the United States.

Which Type of Bankruptcy Is Ideal for Your Situation?

Chapter 7 vs. Chapter 13

Most individuals only qualify for Chapter 7 or Chapter 13 bankruptcy since the other categories of bankruptcy are tailored to specific persons or businesses. To demonstrate how they vary, here is an in-depth comparison.

The most significant distinction between Chapter 7 and Chapter 13 bankruptcy is the individual’s assets and regular income level. If a person has recently lost a job or has inconsistent income, for example, they may be forced to file Chapter 7 bankruptcy. However, if the means test shows that they make sufficient money to pay off their obligations, they are going to be placed in a Chapter 13 bankruptcy instead. If preventing house foreclosure is a key goal, someone might file for Chapter 13 bankruptcy, or they might file for Chapter 7 bankruptcy if time is an issue – as it is quicker than Chapter 13.

However, bankruptcy is a frightening process, and deciding between Chapter 7 and Chapter 13 is like choosing between two evils. Privacy is thrown out the window in both circumstances. All of your information is physically placed out on a table for the judge to review. Then there is the factor that nearly half of all Chapter 13 bankruptcy cases get dismissed since the debtor is unable to meet the required monthly payments. 

Although creditors are not allowed to pursue the money from you while you are in bankruptcy, the court may pursue you more aggressively than any credit card company if you miss payments in Chapter 13. If the bankruptcy case is rejected, creditors are then able to deduct their fees directly from your salaries or wages, and your home may be repossessed.

Chapter 7 vs. Chapter 11

Businesses can petition for bankruptcy under Chapter 7 or Chapter 11. Furthermore,  businesses that file for Chapter 7 bankruptcy are on their way out. All of the company’s nonexempt assets are sold, including personal property and real estate, and unsecured creditors are repaid in terms of priority. Businesses are not allowed to seek exemptions; everything is subject to the same rules.

A Chapter 11 type of bankruptcy, alternatively, can be utilized to restructure a company’s financial commitments and debts. The automatic stay provides bankruptcy protections to businesses, allowing them to establish a payment plan. Small firms are able to file a less difficult form of Chapter 11 called Subchapter V, which commenced on February 20, 2020.

Bankruptcy can appear to be a magic wand that may solve all of your troubles. However, it is far from a wonderful event, and it has a significant emotional cost. A bankruptcy attorney can help you determine whether you qualify for chapter 7, chapter 9, chapter 11, chapter 12, chapter 13, or chapter 15 bankruptcy. Many individuals declared bankruptcy before entirely changing their financial habits, and they never recommend others to do so. In fact, many people compare bankruptcy to divorce, claiming that it should only be used as the last resort after exhausting all other options.

Therefore, let us have a look at several alternatives to filing for bankruptcy.

Are There Any Alternatives to Filing for Bankruptcy?

It is possible to escape bankruptcy, no matter how much debt you are in. You simply need to be aware of your possibilities. Here are some actions you may take to get out of debt without having to file for bankruptcy:

  • Develop a budget
  • Prioritize necessities
  • Boost your disposable income
  • Develop your own repayment plan
  • Sell items you no longer have use for

Develop a Budget

As we previously stated, in Chapter 13 bankruptcy, the court places you on a budget and keeps track of your expenditures. However, you can do all of these things without declaring bankruptcy. Establishing a budget may be a game-changer if you are on your last legs. You may find the money you were not aware you had if you track where the money goes instead of speculating over where it went. Budgeting also entails eliminating all superfluous expenses in order to pay off debt. Subscriptions and cable may have to be canceled. There is no more eating out. There are no more vacations. You are in the midst of a survival situation.

However, instead of the government instructing you how to handle your money for five years as they would in a bankruptcy case, you get to make the decisions.

Prioritize Necessities

Before doing anything, make sure you have covered the Four Walls: food, utilities, housing, and transportation. If you do not have food to eat or a place to sleep, you cannot get the energy to figure your way out of debt. As a result, ensure you prioritize your own health and that of your family. 

Boost Your Disposable Income

Your income is the most effective weapon you have for accumulating wealth (and avoiding debt). The more money you earn, the more money you have to put toward your debt. As a result, you may have to take on a second job or work longer hours at your present employment to help you make ends meet while you catch up on your monthly payments. Yes, it is exhausting at times; however, your short-term sacrifice is always well worth it in the end.

Develop Your Own Repayment Plan

Were you aware that before your debt may be erased, most bankruptcy courts demand you to take a financial literacy course? This is due to the fact that debt has become a way of life for so many people. It does not have to be that way, though! It might be simpler for you to start a financial plan that is cheaper than going to the bankruptcy court.

Sell Items You no Longer Have Use for

Recall how we said that under Chapter 7 bankruptcy, the court liquidates your assets? What if you tried selling your belongings? Sell any item of value you do not need, such as boats, fancy leaf blowers. Everything you do not need may have to go: furniture, jewelry, collectibles, and that instrument you swore to learn to play soon. Doesn’t it seem a little out there? This is essentially what happens if you file for bankruptcy, only you are not able to decide how your belongings are auctioned. So go to Craigslist or Facebook Marketplace and sell your goods for a quick profit.

The Bottom Line

Nobody enjoys being in debt. However, if this is your situation, there are various kinds of relief available for different types of filers under the United States Bankruptcy Code. The chapter of bankruptcy that best fulfills your aims is usually determined by your financial situation, with the assistance of a bankruptcy attorney.

If you are looking to avoid a repossession because of a temporary loss of income, Chapter 13 bankruptcy can be the best option for you. If your auto or property payment is not the issue, but you are facing income garnishment due to medical costs or credit card debt, Chapter 7 may be a better option.

In any case, keep in mind that bankruptcy is a safety net, and there is no shame in utilizing the United States bankruptcy laws to gain a fresh start, even if it doesn’t feel like it. That is why they are there in the first place.

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