The different types of bankruptcy

There are four main categories under which bankruptcy can be filed; Chapter 7, Chapter 11, Chapter 12, and Chapter 13 of Title 11 of the United States Code. Each of these chapters is specific to the needs of the debtor and the creditor.

Chapter 7 Bankruptcy

Chapter 7 is the most commonly known and understood bankruptcy option. When an individual(s) or a corporation files for Chapter 7 bankruptcy, the non-exempt assets are sold by a trustee and the proceeds are used to pay the debtor's creditors. In order to be eligible for Chapter 7 bankruptcy relief, the debtor must meet the means test. The court will use this test to determine if the debtor is attempting to abuse the use and the purpose of Chapter 7 bankruptcy. When using Chapter 7 debt relief, the debtor is not subject to a repayment plan, but rather the creditors accept payment in full via a negotiated settlement.

Chapter 11 Bankruptcy

Chapter 11 is considered a reorganization of a company or a partnership. Chapter 11 usually allows the company or the partnership to proceed to run the business to the best of their abilities, with the caveat that the business activities are closely watched over by the court or a court-appointed individual or committee. This allows the business to continue to function and provide services for its customers. During the course of remaining open and available for business, the debtor and the creditors will create a plan for the reorganization and a proposal for payment of the outstanding debts to the creditors.

Chapter 12 Bankruptcy

Chapter 12 bankruptcy is specific to those families who own farms and have gone into debt. This chapter allows the family to retain the property and continue to work the land. The outstanding debts are then paid out of future proceeds. However, it is required that the debtor show that they have an ongoing regular annual income in order to qualify for Chapter 12 relief.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a repayment plan for individuals with regular income and unsecured debt less than $336,900 and secured debt less than $1,010,650. In this instance, the debtor keeps his property and makes regular payments to the Chapter 13 trustee out of future income to pay creditors over time (3-5 years). Repayment percentages can vary depending upon the debtor’s income and the makeup of the debt. One of the most significant aspects of Chapter 13 is that it allows homeowners a chance to have their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time.

When an individual or a corporation or a partnership is willing to come forward and work honestly and efficiently and diligently with the courts, the creditors, and the various legal professionals who are experienced in the area of bankruptcy law, the results can allow for families and businesses to remain intact, financially, and create a win/win outcome for all involved.

If you have a question about bankruptcy and if it is the best choice for your situation, give us a call. Talking to an attorney can help you avoid common bankruptcy mistakes. During your free consultation, we will review your situation and answer any questions you may have about bankruptcy options and which one is the best for you.

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