Types of Bankruptcy

What is Bankruptcy?

This is a legal process through which people and businesses can repay part of their debts. In some cases all debts are cleared under certain conditions. The two main ways filing bankruptcy can be used to help manage debt is via processes known as reorganization and liquidation.

Liquidation Bankruptcy

Chapter 7 falls under the liquidation banner. It is called liquidation bankruptcy because the individual’s or company’s assets are sold (liquidated) to pay down or clear outstanding debts. This type of bankruptcy is discussed below:

Chapter 7

This can be filed by both individuals and businesses and is one of the better known types. Chapter 7 generally lasts for a minimum of three months and a maximum of six months. When filed by a company it is called Business Chapter 7 bankruptcy. On the other hand, when filed by an individual, it is referred to as Consumer Chapter 7 bankruptcy.

Under this type of bankruptcy, most unsecured debts will be cleared by a court, that is, they will no longer exist. The assets of the debtor are sold off by a trustee appointed by the court. However, this type of bankruptcy filing means that the company will cease to exist.

Many advisors recommend finding an alternative to Chapter 7. However, there are cases when it is the best way out of debt.

Reorganization Bankruptcy

There are also various types of reorganization bankruptcy. This one refers to situations where the debtor does not need to sell off assets to clear debts. Instead, special arrangements are made to restructure and reschedule debt repayments. Of course special conditions will need to be met.

Chapter 11

While mostly filed by companies, individuals can also file Chapter 11 bankruptcy. This type of situation enables a business to continue operating while putting in place repayment plans to clear debts. In fact, it allows a company that is facing financial difficulties time in which to try and turn their operations around. Chapter 11 is said to be one of the most expensive and difficult types of bankruptcy to file.

Chapter 12

This type is generally filed by fishermen and farmers. With this plan, the affected person will need to detail how they will pay off or reduce their indebtedness. The period given for this repayment is between three to five years. The repayment plan will be based on the person’s income. Persons in this category who only earn seasonally have special alternative requirements for filing.

Chapter 13

This type of reorganization bankruptcy is for individuals and some small businesses. Only people who have an income can file under Chapter 13, hence the name wage earners’ bankruptcy. Since they have a source of income they are expected to develop a repayment plan. All debts incurred prior to filing must be paid off within three to five years. There is also no deadline as to when someone can file Chapter 13. The good thing about this type is that the debtor’s property is not taken away and sold.

Thankfully, bankruptcy is not the end of the world. However, knowing about each type is helpful just in case you ever have to consider going this route. When faced with financial problems that may lead to bankruptcy, it is advisable that you contact a bankruptcy attorney or another person experienced in bankruptcy matters.

Thank you to Jessica McCurdy Crooks for this "Types of Bankruptcy" article.

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