There are only a few main types of bankruptcy filings. These are Chapter 7, Chapter 11, Chapter 12, Chapter 13, and Chapter 9. The type of filing that happens depends on someone’s financial situation. The most common type of filing is Chapter 7 bankruptcy since companies, individuals, and married couples are allowed to file for Chapter 7 bankruptcy. If you need help with bankruptcy, it can be a good idea to reach out to a lawyer. Filing for bankruptcy may seem simple enough, but it can be a complex process that if done incorrectly can further affect your financial future. A lawyer can help you decide which option is best for your financial situation.
A debtor who files for Chapter 7 bankruptcy is basically scrapping everything and starting over with a clean financial slate. Once the filing is underway, a trustee is appointed in order to sell the debtor’s assets. This doesn’t mean that everything a person owns is sold and both federal and state laws have some exceptions. What is not exempt is sold and then once the assets are liquidated the bankruptcy trustee pays some creditors a portion of the money that they are owed. Not all the creditors are going to receive money from the proceeds so, under this type of bankruptcy, financial obligations are discharged. If you file for Chapter 7 bankruptcy then you aren’t able to file again for seven years and the debts that weren’t forgiven in a previous filing can’t be discharged in the next filing. There are some debts that won’t ever be discharged by bankruptcy. These include taxes, child support obligations, and alimony. Student loans are also rarely discharged. If a lot of the debt falls into these categories then another type of bankruptcy may be better. You are only able to file for Chapter 7 bankruptcy if the court says that you don’t make enough money to pay your debt. There will be a means test, comparing your income to the state average. The court looks at your finances to see if you have disposable income and the means to pay back your debt. If your income is too low then you may qualify.
Chapter 13 and Chapter 12
Chapter 12 and Chapter 13 bankruptcy are similar. Chapter 12 bankruptcy is used only for family farmers and Chapter 13 is used for other individuals, even those who are self-employed, which is why Chapter 13 is more common. If you have a steady income and less than $269,250 in unsecured debts and less than $807,750 in secured debt then you are able to file for Chapter 13. When this type of bankruptcy is filed, you are assigned a trustee. Both the trustee and debtor develop a repayment plan. The court will then accept or change the plan. The court can also dictate another payment plan as well. Once a repayment plan is decided on, it can last from three to five years. Under both Chapter 12 and Chapter 13 filings, a debtor doesn’t have to liquidate assets. This means that a debtor can keep everything and not just the exempt assets. In many cases, the debtor is only going to be repaying a percentage that he or she owes, which can make Chapter 12 or 13 bankruptcy a more appealing option than Chapter 7 bankruptcy.
Chapter 12 bankruptcy is only available to family farmers. These farmers need to have regular income and some requirements are related to assets, debts, and income. Just like with Chapter 13, there needs to be a repayment over three to five years and a trustee oversees the bankruptcy payments and process. This allows the family farmer to still operate the farm during the repayment period.
Chapter 11 bankruptcy is also similar to Chapter 13, but the difference is the amount of money that is owed by the debtor. Traditionally, Chapter 11 bankruptcy was only meant for corporations, but individuals can also file for Chapter 11 bankruptcy. Under Chapter 11 bankruptcy, the corporation puts together a repayment plan within 120 days. Some options in the plan can be rescaling business operations, discharging burdensome leases and contracts, or reducing debts while repaying some of them and discharging others. When the plan is successfully completed then the debtor will have a reorganized, more profitable business with reduced debt.
You likely haven’t heard of Chapter 9 bankruptcy since this type of bankruptcy is only available to municipalities, such as towns, cities, counties, taxing districts, school districts, or municipal utilities. Chapter 9 bankruptcy is similar to Chapter 11, where the municipality can propose a plan of repayment
Which Bankruptcy Is Right for You?
The most common types of bankruptcy are Chapter 7 and Chapter 13. The main difference between which one is best to file depends on income level and assets. For example, if someone doesn’t have a steady income or a recent job loss then it can make more sense to file for Chapter 7 bankruptcy. However, if an individual has disposable income or the means test says there is enough money to pay back debts then Chapter 13 bankruptcy makes more sense. An individual may also want to choose Chapter 13 bankruptcy if avoiding foreclosure is a priority. Chapter 7 bankruptcy may be an option if the timing is the biggest issue since it’s faster than Chapter 13. Other benefits of Chapter 13 bankruptcy include reducing the principal balance on a car loan or investment property or eliminating a second mortgage or another unsecured lien. Depending on your specific situation, Chapter 11 or Chapter 12 bankruptcy can be an option, but most people won’t fall into those categories.