Bankruptcy Explained: 6 Types of Bankruptcy

Bankruptcy refers to the legal process of relieving debtors of monetary obligations. Bankruptcy provides financial relief to individuals or businesses in large amounts of debt. Going bankrupt is a method of starting over when debtors can no longer afford to pay back creditors, though completing the process carries its own consequences. The bankruptcy process can stop debt collection and wage garnishment, and it may prevent lenders from repossessing assets and foreclosing real estate. The federal court system handles bankruptcy proceedings.

Bankruptcy laws vary by state, but the six different types of bankruptcies include:

1. 1. Chapter 7 bankruptcy: Chapter 7 bankruptcy, also known as liquidation, is the most common type of bankruptcy for individuals. Chapter 7 bankruptcy involves the liquidation of remaining assets to help pay back creditors, and debtors can usually be relieved of qualified, unsecured debt like medical bills, personal loans, and credit card debt. Taxes, student loans, alimony, and child support are not forgiven.
2. 2. Chapter 9 bankruptcy: Municipalities such as cities and school districts can use Chapter 9 bankruptcy to help pay back any debts. This process helps keep creditors away from the assets of towns, counties, cities, and other public districts while executing a repayment plan.
3. 3. Chapter 11 bankruptcy: Chapter 11 bankruptcy allows debtors to continue running their company or business while liquidating assets to help pay back debts. This form of bankruptcy, which bankruptcy courts and creditors must approve, may promote a significant reorganization of a company to help create more equity and less debt.
4. 4. Chapter 12 bankruptcy: This form of bankruptcy is reserved for family farmers and fishers, allowing them to restructure finances in certain circumstances so that they may avoid foreclosure or liquidation.
5. 5. Chapter 13 bankruptcy: In Chapter 13 bankruptcy, individuals can enter a structured payment plan to pay back creditors. This type of bankruptcy is for high-income earners or those with highly valuable assets who wish to hold onto their property. These debtors must pay an adequate monthly payment over three to five-year periods. Both Chapter 7 and Chapter 13 deal with bankruptcy for individuals; however, Chapter 13 allows individuals to retain assets during repayment, while Chapter 7 will subject all nonexempt assets to seizure or repossession until debts are fully paid.
6. 6. Chapter 15 bankruptcy: This newer bankruptcy code chapter is primarily for international cases. It helps establish the guidelines for filing bankruptcy across borderlines, like when insolvency cases concern more than one country.

A bankruptcy attorney can help debtors navigate the process of filing for bankruptcy. The process involves the following steps:

1. 1. Eligibility: Before filing for bankruptcy, a debtor must prove they cannot repay the debt and must complete credit counseling.
2. 2. Bankruptcy petition: The legal proceeding of bankruptcy typically begins when a debtor files a bankruptcy petition.
3. 3. Automatic stay: The first time a debtor files for bankruptcy, the court will issue an automatic stay to prohibit collectors from pursuing foreclosure proceedings and debt collection.
4. 4. Repayment: Depending on the type of bankruptcy, a bankruptcy trustee might oversee the liquidation of assets or a bankruptcy estate sale. Some exemptions from bankruptcy include life necessities like pensions, clothing, household appliances, and a certain amount of the wage earner’s unpaid regular income. However, non-exempt property subject to seizure includes second homes or vehicles, bank accounts, bonds, collections, and family heirlooms.
5. 5. Discharge order: When the repayment is complete, the bankruptcy judge will discharge the debtor, and the courts will close the case. Depending on the type of bankruptcy, debtors may need to attend a meeting with creditors or complete a financial course before the case can close.
6. 6. Impact: In many bankruptcy cases, the process offers debtors a fresh start. If debtors go through the process of Chapter 7 bankruptcy, there will be significant damage to their credit score that will remain on their credit report for at least ten years. Chapter 13 bankruptcy affects the credit score for seven years, as they are still repaying some debt.

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