Five Most Frequent Forms of Bankruptcy
Bankruptcy may be a viable option when you can’t get out from under your debt without jeopardizing your job. Because they are accessible to individuals, Chapter 7 and Chapter 13 bankruptcy are the most frequently filed bankruptcy forms.
On the other hand, other kinds of bankruptcy apply to companies, people, and other organizations. Here’s everything you need to know about each kind of bankruptcy.
Different types of bankruptcies
There are five kinds of bankruptcy under the United States Bankruptcy Code for debts due in the United States (the sixth, Chapter 15, deals with debt encompassing more than one country).
Each one applies to a certain kind of debtor. Each chapter has a distinct objective, such as liquidation, in which specific assets are liquidated to repay creditors or restructuring. A payment plan is established to pay off a portion or all of the debt due.
Individuals or companies may give up nonexempt assets and walk away from most obligations under Chapter 7, commonly known as liquidation. To be eligible, debtors must meet the means test, which requires that their income be less than the state’s median income.
Not all debts may be dismissed, and discharge in Chapter 7 bankruptcy is not automatic. People who successfully discharge qualifying debt are no longer responsible for it.
This provision permits towns to restructure their debt. Whether a school district, city, or county is in financial trouble, Chapter 9 bankruptcy enables them to reorganize their debt and establish a strategy without liquidating their assets.
Municipalities that apply for Chapter 9 may restructure debts by decreasing current interest rates, reducing principal amounts, extending payback terms, or refinancing.
Chapter 11 bankruptcy, often known as reorganization, allows people — and, more frequently, companies — to reorganize debt. It enables the filer to devise a strategy for repaying some debt while keeping assets.
Because the company is considered a distinct entity from the shareholders, corporations declaring Chapter 11 bankruptcy do not risk putting their assets in jeopardy. Because the owner and debtor of a sole proprietorship firm are the same individuals, both personal and company assets are examined in a Chapter 11 petition.
Chapter 11 is much more complicated and, as a result, more expensive, making it only financially viable for businesses and the very wealthy.
Family farmers and fishers with steady income may restructure their debts under Chapter 12. Although it operates similarly to Chapter 13, this alternative is better for farmers who have bigger debts and do not fall into the Chapter 13 wage-earner category.
It’s also less complicated than the Chapter 11 procedure. Repayment is typically spread out over three years, although a court may decide to prolong the repayment term up to five years if it deems it necessary.
The debtor’s debt is dismissed after they have completed all payments under the restructuring plan. Certain obligations, like child support or alimony, are not dischargeable under Chapter 12.
Individuals who need to reorganize their debts may use Chapter 13 the same way they do with Chapter 11. Some creditors will be paid in full, plus interest, while others will only be paid a portion of their obligation.
The payback term is usually between three and five years.
This form of bankruptcy necessitates debtors having a steady source of income, and there are debt ceilings that limit eligibility. Unsecured debts must be less than $394,725, and secured obligations must be less than $1,184,200 to qualify for this filing.
The debtor’s house is not in danger of foreclosure during these procedures, which is a benefit of Chapter 13.
What should you do if you have a lot of debt?
If you’re drowning in debt, there are a few alternatives available to you. These are some of the options:
Directly negotiating with creditors
Creditors would prefer to get part of the money they owe rather than nothing at all (as with Chapter 7 bankruptcy). Make your financial position clear to them, and see if they’re willing to work with you on a payment plan, debt reduction, or other solution.
Counseling on credit
If you need further assistance, a nonprofit credit counseling organization may assist you. They’ll assist you in putting an end to collection calls and developing a debt management strategy that’s appropriate for your financial circumstances. The National Foundation for Credit Counseling has additional information.
If you’ve exhausted all other options for dealing with your debt, bankruptcy may be a possibility. This route has long-term consequences for your credit, perhaps affecting your score for seven to ten years.
Bankruptcy is a difficult procedure, so if you speak with a bankruptcy lawyer, you feel it’s the best choice. You must seek credit counseling from an authorized organization within 180 days after officially declaring bankruptcy, regardless of which bankruptcy chapter you choose.
Remember that bankruptcy does not erase all debt, so this choice does not ensure that you will be debt-free. Before making this life-altering choice, make sure you speak with an impartial bankruptcy or credit expert.
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