When we think of bankruptcy, we often think of it as one big process. In many cases, we are under the assumption that bankruptcy can eliminate debts and solve money problems (with the consequence of destroying one’s credit score). However, this is not the case. Bankruptcy will not necessarily clear all debts, and there are several types of bankruptcy. Indeed, bankruptcy law allows for a variety of situations, and you will need to consider which type of bankruptcy is most likely to be best for you.
Chapter 7 Bankruptcy
This type of bankruptcy is known for its liquidation. Businesses can also use this, but we often think of Chapter 7 bankruptcy as what individuals are more inclined to use. It is simple and relatively straightforward, as well as quick. In this type of bankruptcy, you submit all of your non-exempt property (your home is often exempt) to a trustee. Exemptions vary according to state, and can include trade tools, books, Social Security payments and unemployment. The property is liquidated, and payment distributed to unsecured creditors. You get a discharge of remaining debt in some cases. There are some instances, though, that can make you ineligible for the discharge of your debts, including concealing records. Also, some debts are not dischargeable. These include:
- Student loans
- Some tax debt
- Spousal support
- Child support
In 2005, new qualifications for filing for Chapter 7 bankruptcy protection were introduced into law. Now, a means test is conducted, and if the judge overseeing the case feels that you have the means to make payments, you may find your bankruptcy dismissed — or you may be forced to switch to Chapter 13. As a result of these measures, Chapter 7 bankruptcies dropped following the implementation of the 2005 reform law. Chapter 7 is on the rise again, probably due in part to the recent recession.
Chapter 13 Bankruptcy
credit: Bart van Damme
Instead of turning over non-exempt property and the immediate discharging of some debts, Chapter 13 bankruptcy involves creating a plan to repay creditors at least some of what is owed. The plan is based on what you can afford. You create a plan that takes three to five years, with you making payments to a trustee, who then disburses the money. If your income is low enough, you make payments for three years. Those whose income is higher have to make payments for the full five years. Any debt remaining after the payment plan term ends is discharged. You cannot have more than $922,975 in secured debt and $307,675 in unsecured debt to participate in Chapter 13 bankruptcy.
Your creditors can object to the plan, but beyond that do not have a say in it. The judge decides whether to accept your proposed payment plan. Chapter 13 bankruptcy is helpful if you want to protect some secured assets, such as a car loan. If your income is above the median for a family in your state of residence, you have no choice but to file Chapter 13, since Chapter 7 is not available to you.
Both types of personal bankruptcy require that you go through credit counseling as part of the requirements, and your credit score will be hit pretty hard. Consider consulting a bankruptcy attorney before you proceed with either type.
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Chapter 11 Bankruptcy
If you have a business, and you are running into trouble, you can use Chapter 11 Bankruptcy to reorganize your finances. Businesses can use Chapter 7 bankruptcy for liquidation, but the restrictions on Chapter 7, especially the fact that the business must cease operations, can make Chapter 11 bankruptcy more desirable than Chapter 7 bankruptcy for businesses. There are allowances in Chapter 11 bankruptcy for the business to continue operation while in bankruptcy, and there are provisions for the rewriting of collective bargaining agreements and restructuring of pensions and other obligations.
During Chapter 11 bankruptcy, the trustee can run the debtor’s business. This means that while the trustee is running your business, it is possible for the business to obtain financing under very favorable conditions (new lenders get priority on earnings, though). Additionally, when you undergo Chapter 11, your business and you as a debtor receive an automatic stay so that litigation against you cannot proceed until things are sorted out. This means that the litigation is either settled as part of the bankruptcy, or goes forward after the business emerges from Chapter 11.
Like Chapter 13 bankruptcy for individuals, a plan for repayment can be created for Chapter 11 bankruptcy. However, unlike Chapter 13, creditors in Chapter 11 Bankruptcy can vote to accept the plan. It can take months — or even years — for a business to emerge from Chapter 11 bankruptcy, since the restructuring process can be long and complex. If your business owes more than it has in assets, though, Chapter 11 can mean business owners are left with no ownership in the company. Instead, the restructuring of the company can lead to the creditors owning the company.
Other Types of Bankruptcy
There are also types of bankruptcy. These include Chapter 9 for municipal governments. If you have particular needs as a family farmer or fisherman, you can look into Chapter 12 bankruptcy. Chapter 15 bankruptcy is designed to help in international cases, and for foreign debtors.
- Chapter 9 Bankruptcy: The point of Chapter 9 bankruptcy is to help cities restructure their finances without raising taxes. It used to be that creditors to cities could force municipalities to raise their taxes in order to pay creditors. This could result in hardship for some citizens. In response, and over decades, Chapter 9 finally emerged. Chapter 9 bankruptcy allows cities to rewrite collective bargaining agreements with greater ease than what is seen in Chapter 11. Indeed, state labor laws can be trumped by Chapter 9. However, in some states cities must have authorization from the state in order to file for bankruptcy.
- Chapter 12 Bankruptcy: Because farmers and fishermen work under different circumstances and stresses than many ordinary wage earners, there are some special provisions made for them in bankruptcy proceedings. A Chapter 12 bankruptcy is quite similar to Chapter 13 bankruptcy. However, the debt ceilings are higher, and there are more exemptions to property that can be used to repay debts. Originally, Chapter 12 bankruptcy was meant to be temporary, but it was made permanent by the 2005 changes to bankruptcy law.
- Chapter 15 Bankruptcy: It is important to note that Chapter 15 bankruptcy is more about jurisdiction than anything else. It establishes protocols for cooperation with other nations in cross-border corporate bankruptcy cases. With business becoming increasingly global, provisions for the sharing of information need to be made. While assistance to those in other countries is allowed with Chapter 15 bankruptcy, it is worth noting that the extent is discretionary, and U.S. courts decide how to proceed.
This is a guest post Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.