Bankruptcy is misunderstood by the general public. It’s one of those things that never seems to make sense. How can a celebrity or a super-rich businessperson declare bankruptcy and still seemingly own big houses and cars; how can it be the end of the world for the average person and a mere blip for the super-rich; and why are there are many different types?
We will address all of those questions in this guide as we will at the different forms of bankruptcy and what they mean. If you would like to know more, checkout our guides on How to File for Bankruptcy and How Bankruptcy Affects Your Credit Score.
Chapter 7 Bankruptcy
This is the most common type of bankruptcy filed in the United States and is also known as “straight bankruptcy” and “complete bankruptcy”. This is what you file when you are looking to make a complete fresh start and it can provide you with some options of escape, but it can also wipe out everything that you have bought and earned up to that point.
When you file for a chapter 7 bankruptcy a trustee will be assigned to you and they will reduce all of your assets to cash, before distributing this to your creditors.
Who Should File Chapter 7 Bankruptcy?
If you believe that there is no hope, that you can not and will not pay off your debts, then you may want to consider chapter 7. Your debts will be cleared after your assets have been liquidated and you can then make a fresh start, albeit with a big red mark against your credit report for the next ten years.
What is Exempt from Chapter 7 Bankruptcy?
Bankruptcy exemption laws differ from state to state, but they all have them and it is these laws that dictate what you can and can’t keep at the point of liquidation. Exemption laws typically let you keep some equity in your home and your car, and there are also laws that may allow you to keep other possessions.
It is important to note, however, that these exemption laws are set to a monetary amount as opposed to a single item. For instance, your car may not be exempt entirely, but rather a vehicle to the value of $3,000 may be exempt.
Chapter 9 Bankruptcy
A chapter 9 bankruptcy allows for restructuring and reordering of a business to ensure it can find a reasonable way to pay back a debt. It is not the end of the world and a business can continue to operate as normal. However, as discussed below, this is not available to everyone.
Who Should File for Chapter 9 Bankruptcy?
Only cities, towns, villages and other municipalities in the United States can apply for this type of bankruptcy.
Chapter 11 Bankruptcy
This is basically a type of financial reorganization that applies to businesses who want to continue with the business while looking at alternative ways to pay back their creditors. If you’ve ever heard of stories of big businesses declaring bankruptcy and then seemingly going on as normal, it may be because they have filed for this type of bankruptcy.
Who Should File for Chapter 11 Bankruptcy?
Only businesses can apply. When they do they will have 120 days to create a reorganization plan that will then be evaluated by other creditors. It is possible to return the business to profit after completing this bankruptcy and it is by no means a drastic last resort that leaves them crippled.
Chapter 12 Bankruptcy
This is a unique type of bankruptcy that allows the debtor to create a repayment plan over the course of 3 to 5 years and in many ways it is similar to chapter 13, which is discussed below.
Who Should File for Chapter 12 Bankruptcy?
This is reserved for family farmers who want to pay off their creditors in a comfortable way while still operating their business.
Chapter 13 Bankruptcy
Chapter 13 is for people who want to pay off their debts but are not yet able to do so. It is similar to chapter 7, but it allows the debt to keep a major valuable asset, such as their home, and they also need to create a repayment plan that shows how they can pay their creditors back between three and five years.
Once the plan of action is agreed upon then the debtor will be assigned a trustee through which they will make payments. At all times the debtor will be protected from debt collections, lawsuits, wage garnishing and other such actions usually taken against debtors.
Who Should File for Chapter 13 Bankruptcy?
If you can not pay off your debts that do not fall within the criteria of chapter 7 bankruptcy, such as child support or taxes, or you have sizable assets that are worth more than the value of the exemptions, then you may choose to file a chapter 13 bankruptcy.
What is Exempt from Chapter 13 Bankruptcy?
When you file for chapter 13 bankruptcy you will be afforded more leniency with regards to what assets you can keep, including your house and your car. Providing you can come to an agreement regarding what you can pay back and when, then you may be able to avoid losing any significant assets.
What Type of Bankruptcy is Right for you?
If you are an individual then it’s a choice between chapter 7 and chapter 13. If you are a business then you may want to consider chapter 11. There are several different forms of bankruptcy, but as discussed above, you will only ever need to consider 2 of these based on your situation and because there are notable differences between them, there should be one that jumps out at you.
However, there are a lot of complications involved with the bankruptcy process and it’s always good practice to hire a bankruptcy lawyer to help you with this process. Not only will they ensure that you make the right choice and help you to create a good repayment plan, but they can also help with regards to exemptions, potentially saving you a lot of money in the long run and stopping you from losing everything that you own.
The time it takes and the amount of money it costs to hire a bankruptcy lawyer is tiny when compared to the amount of time and money that it can save you. And when you’re going through a process as lengthy, as stressful and as costly as this, you need all of the help that you can get.