The 5 most common types of bankruptcy
When you can’t get out of your debt without hurting your livelihood, bankruptcy can be a consideration. Chapter 7 and Chapter 13 bankruptcies are the most common types of bankruptcy, probably because they are available to individuals.
However, there are other types of bankruptcy that apply to businesses, individuals, and other entities. Here’s what you need to know about each bankruptcy option.
Types of bankruptcy
The United States Bankruptcy Code includes five types of bankruptcy for debts owed to the United States (the sixth, Chapter 15, deals with debt that encompasses more than one country). Each applies to a specific type of debtor. Each chapter has its own purpose, offering either a liquidation, in which certain assets are used to repay creditors, or a restructuring, when a payment plan is created to pay some or all of the debt owed.
Chapter 7, also known as liquidation, allows individuals or businesses to give up non-exempt assets and get out of most debt. To be eligible, debtors must pass the means test – that is, their income must be less than the median income for their state.
Not all debts can be discharged, and discharge is not automatic in Chapter 7 bankruptcy. People who successfully discharge a qualifying debt are no longer responsible for the debt.
This section allows municipalities to reorganize debt. Whether it’s a school district, city, or county facing financial difficulties, Chapter 9 bankruptcy allows it to restructure debt and create a plan without selling its assets.
Municipalities filing for Chapter 9 can reorganize debts by lowering the interest rate on existing debt, reducing the principal amount, extending the repayment term or refinancing.
Also known as reorganization, Chapter 11 bankruptcy is aimed at individuals – and, more generally, businesses – to restructure debt. It allows the depositor to write a plan to pay off certain debts while retaining the assets.
Companies that file for Chapter 11 bankruptcy do not risk endangering the personal assets of shareholders, as the company is seen as a separate entity from the stock owners. In a sole proprietorship, on the other hand, the owner and the debtor are the same person, so both personal and business assets are factored into a Chapter 11 filing.
Chapter 11 is much more complicated, and therefore expensive, which makes it financially feasible primarily for very wealthy businesses and individuals.
Chapter 12 allows family farmers and fishermen with regular income to reorganize their debts. Although it works similarly to Chapter 13, this option is more beneficial for farmers who have larger debts and do not meet the employee classifications of Chapter 13. It is also simpler than the Chapter process. 11. Repayment usually extends over three years, but a court may also decide to extend the repayment period up to five years if it deems this time justified.
Once the debtor has made all of the reorganization plan payments, their debt is discharged. Some debts, such as child support or alimony, are not dischargeable through Chapter 12 bankruptcy.
Similar to Chapter 11, Chapter 13 is available for people who need to restructure their debt. Some creditors will be repaid in full with interest, while others will be repaid a percentage of the debt. Typically, the repayment period is three to five years.
This type of bankruptcy requires debtors to have regular income, and there are debt thresholds that restrict eligibility. Unsecured debts under this deposit must be less than $ 394,725 and secured debts must be less than $ 1,184,200. One advantage of Chapter 13 is that the debtor’s home is not at risk of foreclosure during these proceedings.
What to do if you have too much debt
If your debt seems overwhelming to you, there are a few options you may have. Some of these paths include:
- Negotiate directly with creditors. Creditors would rather get some of the money you owe, rather than risk getting nothing (as in Chapter 7 bankruptcy). Be transparent about your financial situation and see if they are willing to work with you on a payment plan, debt reduction, or some other solution.
- Credit counseling. If you feel like you need more advice, a nonprofit credit counseling agency can help. They will help you stop collection calls and create a sustainable debt management plan for your financial situation. You can learn more from the National Foundation for Credit Counseling.
- Bankruptcy. Bankruptcy filing is an option if you have tried all the other ways to settle your debt. This route has lasting effects on your credit report and can hurt your credit for seven to ten years.
At the end of the line
Bankruptcy is a complicated process, so if you decide it is your best option, you should consult a bankruptcy lawyer. Regardless of which chapter on bankruptcy you file, you must take credit counseling from a licensed agency within 180 days before you officially file for bankruptcy.
And remember, not all debts are discharged in bankruptcy, so this option is not guaranteed to erase everything you owe. Be sure to consult an impartial bankruptcy or credit professional before making this life-changing decision.