Bankruptcy can be a helpful option for those who are not able to pay off their debts. Learn about the different types of bankruptcy Chapters that can be filed.
Bankruptcy is supposed to be a second chance for individuals or businesses that have financially collapsed. There are still downsides to this process, but for those who are in need, it can be the fresh start they need after falling on hard times financially.
What is Bankruptcy?
In simple terms, bankruptcy is a legal process or financial status that relieves a debtor of all debts. Sounds great, but there is a price involved and a reason filing for bankruptcy isn’t the most ideal solution to all debt problems. Normally, bankruptcy is something that a debtor will file with a court when they are unable to repay their debts to creditors.
Filing for bankruptcy involves a court proceeding between a judge, the debtor, and anyone else that might be involved in the borrowing, lending, or assets. The court will go over the case and determine whether the debtor really is unable to make any payments. They might find that the debtor really is unable to make any repayments, or they might find that the business or individual does have assets that could repay the debts.
Main Types Of Bankruptcy Chapters
The different kinds of bankruptcy are referred to as “Chapters.” The pros, cons, and terms of bankruptcy will depend on what bankruptcy type the debtor or indebted entity falls under. The terms and conditions will also depend on the state and country the debtor resides in.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is one of the more common types for the average person seeking debt relief. This type of bankruptcy is generally used by debtors who have low income and few assets. This type generally releases the individual or entity from their obligation to repay their debts.
It also generally protects your exempt property or assets from being seized to repay the debts, like your home. However, nonexempt property could be seized to repay part of the debts, like a second home or stock investments.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is less common and is more often used by large corporations than individuals. This type is sometimes called reorganization bankruptcy because it involves businesses reorganizing their debts. This type also helps businesses stay open while they reorganize their debts.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a type of bankruptcy individuals and entities might pursue before filing for Chapter 7 bankruptcy. This type allows debtors to make a new plan for how they’ll repay their debts. Usually, this plan has some kind of time frame involved like 3 to 5 years. Working alongside your creditors you’ll be able to form a new repayment agreement, and if this repayment agreement is completed within the given time frame, then the rest of the debt will be forgiven.
Other Types Of Bankruptcy Chapters
Chapter 7 bankruptcy, Chapter 11 bankruptcy, and Chapter 13 bankruptcy are the 3 most common types of bankruptcy. Chapter 7 is the most common for low-income individuals with few assets, Chapter 11 is really only used by large corporations to stay in business while they restructure their debt, and Chapter 13 is used to make a financial plan to pay what you can. But there are other options when you’re in a financial bind as well, though they are a little less common.
Chapter 9 Bankruptcy
Chapter 9 bankruptcy is really only used for municipalities like cities, towns, or even school districts. This doesn’t occur very frequently, but it is a way for municipalities to get the financial help they need when they’ve been struck by hard economic times. Usually, this also involves a restructuring of finances and debts and working alongside creditors to make a more achievable repayment plan.
Chapter 12 Bankruptcy
Chapter 12 bankruptcy is meant to be used for family farmers and fishermen. This helps family farmers and fishermen to reorganize their debts and make a new plan with creditors. This type was designed specifically for family-owned organizations in agriculture because their circumstances are often unique to other business types or individuals seeking debt relief.
Chapter 15 Bankruptcy
Chapter 15 bankruptcy is meant for those seeking help with debts, assets, and creditors when more than one country is involved. When another country besides the US is involved in a debt obligation of some kind, then there are different laws and circumstances involved. This particular type of bankruptcy helps to account for these unique circumstances.
How To File Bankruptcy
How to file for bankruptcy is going to partly depend on which Chapter you are filing under. Each type is going to have its own requirements, paperwork, and process. Whatever Chapter you are filing for, most likely you’ll need to hire a lawyer to help guide you through the process and handle the court and paperwork process.
But regardless of your situation, the basic process to filing for bankruptcy looks like this:
Step 1: Determine whether you qualify to file for bankruptcy
First, you’ll need to meet certain requirements and pass some tests, like a means test. A means test looks at all of your finances like your income, assets, and expenses. It then helps determine whether you really don’t have the means to repay your debts. There may be other qualifications to meet as well. For example, to file for Chapter 7 you can’t have filed for Chapter 7 in the past 8 years.
Step 2: Complete credit counseling
Second, they’ll have you complete some official credit counseling before officially filing. Credit counseling can help debtors learn more about finances, budgeting, and debts to ensure they don’t fall into this situation again in the future.
Step 3: Hire a lawyer
If you don’t already have a lawyer on retainer then it’s time to go out and find one. Having a personal lawyer by your side throughout this process is essential to making sure everything is done correctly. Hiring a bankruptcy attorney who specializes in this process is also ideal.
Step 4: File the paperwork
There is a lot of paperwork involved in this process. Your attorney will be able to help make sure you finish all of the necessary paperwork completely and correctly.
Step 5: Meet with trustees and creditors
Now that the process has truly begun, you’ll eventually meet with your lawyer, the trustees involved in handling your situation, and the creditors involved with your debts. If there are any partners involved in your debt or the ownership of assets, then they may be in this meeting as well. This meeting will help everyone get their questions answered and be on the same page with how these debts will be settled.
Step 6: Your bankruptcy plan will be put into place
When filing for bankruptcy a plan for those debts is often created between the court, the court-appointed trustees who are in charge of your finances, and the creditors. Each plan may look a little different depending on the situation and the parties involved. Some plans may include the seizing of nonexempt assets like a second home, a second car, or a boat. Some plans may also include additional financial education courses.
Once this plan is completed your court case will be discharged and the debts will be forgiven. But don’t forget the cons to this process in light of the pros. One of the many downsides to filing for bankruptcy is that your credit history will be impacted for many years.
How long does bankruptcy stay on your credit report? Bankruptcy stays on your credit report for up to 10 years. Your credit score will also take a major hit and need a lot of help rebuilding your credit score.
Bankruptcy can help an overwhelmed debtor get a fresh start by eliminating or reducing debts that have grown too much for a person or business to reasonably handle on their own. The different types of bankruptcy chapters can provide the help, reorganization, and forgiveness necessary for the indebted party to start over again on a clean slate.