What Are the Different Types of Bankruptcy Chapters in the U.S?
Everyone has heard the term bankruptcy before, but not everyone knows what it means and for whom it is intended. The U.S. Bankruptcy Code contains several chapters that focus on the different types of bankruptcy that individuals, businesses, and municipalities can file. Below, we will explain the definition of bankruptcy and what each chapter means.
What Is Bankruptcy?
Bankruptcy is the legal process by which federal bankruptcy courts help individuals and businesses eliminate all or part of their outstanding debts and repay a portion of what they owe.
While bankruptcy can help you get relief from your debt, it’s crucial to understand the serious, long-term consequences that declaring bankruptcy will have on your credit. It will remain part of your credit history for seven to ten years, and it will decrease your chances of getting approved for loans and open credit card accounts.
The Six Types of Bankruptcy Explained
Although the goal of bankruptcy is to generally clear you of debt, not all bankruptcies are created equal. Some are more suitable for individuals, and others are intended to help businesses and large organizations. There are six types of bankruptcy chapters in U.S. legislature. A chapter is a section of the Bankruptcy Code where the specific law is found. Let’s take a closer look at each of the six types.
Chapter 7 Bankruptcy: Liquidation
Also known as straight bankruptcy, Chapter 7 is the most common type of bankruptcy filed by individuals. The process consists of a court-appointed trustee who oversees the sale (liquidation) of your assets (anything of value that you own) to pay off the people you owe money to (your creditors). If there is any remaining unsecured debt (such as medical bills and credit cards), it is typically erased. However, Chapter 7 bankruptcy doesn’t cover all types of debt, such as taxes and student loans.
There are some states where the court won’t force you to sell basic necessities like your car, house, and retirement accounts under Chapter 7. However, there are no guarantees. Chapter 7 can only postpone a foreclosure — it can’t stop it. If you want to keep the things you still owe money on, you need to reaffirm the debt. This means you need to recommit to the loan agreement and keep making payments.
An important note here is that you can only file for Chapter 7 bankruptcy if the court decides that you’re incapable of paying back your debt. In other words, if your income is below the state average, the court will most likely allow you to file under this chapter (this is the so-called means test). Keep in mind that a Chapter 7 bankruptcy will stay on your credit report for ten years, and you can’t file for it again in the next eight years.
Chapter 13 Bankruptcy
Anyone can file for this type of bankruptcy if their secured debt is less than $1,257,850 and their unsecured debt is less than $419,275. Instead of forgiving your debt like Chapter 7 does (more or less), Chapter 13 reorganizes it. In this case, the court will approve a monthly payment plan for you to pay back all of your secured debt and a portion of your unsecured debt for a period of three to five years. The amount of your monthly payment will depend on your income and the debt you have. During that period, the court will check all your spending to ensure you’re following the strict budget they’ve put you on.
Unlike Chapter 7, Chapter 13 lets you keep your assets, and it allows you to catch up to any debt that is not considered bankruptable. Learn More about Chapter 13 Bankruptcy
Chapter 11 Bankruptcy
In most cases, Chapter 11 is used by businesses and corporations. They will typically come up with a plan to continue operating the business while paying off their debt. Both the creditors and the court must approve this plan. In rare cases, it’s possible that real estate investors would file for Chapter 11 when they have too much debt to qualify for Chapter 13.
Chapter 12 Bankruptcy
This type of bankruptcy is suitable for family farmers and fishermen who want to avoid foreclosure on their property or selling all of their assets. It includes a payment plan that, unlike Chapters 12 and 13, has higher debt limits and is generally more flexible.
Chapter 15 Bankruptcy
This type of bankruptcy deals with foreign debtors and international bankruptcy issues. Chapter 15 allows foreign nationals who have assets, business, or property in the U.S. to file for bankruptcy in the country. This is one of the newest types of bankruptcy added to the Bankruptcy Code in 2005.
Chapter 9 Bankruptcy
Chapter 9 is intended to help towns, cities, school districts, municipalities, etc. to reorganize their debt and set up a repayment plan to pay back what they owe. Under this chapter, municipalities earn protection from creditors while they set up the repayment plan.
Why You Need a Bankruptcy Lawyer
As with any legal case, working with a professional attorney can spare you costs, mistakes, and delays. For individuals who wish to file for bankruptcy, it’s not mandatory to have an attorney. However, if your Chapter 7 case involves valuable assets, or you want to file a Chapter 13 case, having a legal professional by your side can save you a lot of trouble.
When you’re considering filing for bankruptcy, sitting down with your lawyer to consider your options and alternatives is crucial. Often, there is a smarter and more appropriate way to settle your financial situation that does not involve bankruptcy and the public scrutiny that comes with it.
A skilled attorney will explain the different types of bankruptcy and the most suitable one for your case. They will also help with the preparation process, which typically includes applying the means test, valuing your property, choosing and applying for exemptions, and determining Discharge of Debts, among other things. They will help you during the case with your paperwork, negotiations with creditors, and offering sound advice along the way.
If you want to consult with an attorney in Bankruptcy Law, let Legal Chiefs help. We have a wide network of legal experts ready to take on your case!