The Four Types Of Bankruptcy

The Four Types Of Bankruptcy
Photo by Chris Potter – CC BY 2.0

In the unfortunate event that an individual or business is no longer able to make payments to their creditors, there are several types of bankruptcy options that may be considered. While some are designed to liquidate assets in order to pay the balances owed to creditors, others allow the debtor to continue operating as long as a plan is formulated to repay the debts from continued profits. The four types of bankruptcies are named after their respective chapters as outlines in the United States Bankruptcy Codes and are known as chapters seven, eleven, twelve, and thirteen. Whether the debtor is an individual citizen with outstanding debt or a struggling business there is an appropriate avenue to take to file for bankruptcy.

Before attempting to comprehend the four ways in which to file a bankruptcy, it is important to understand the differences between secured and unsecured debts. In the case of secured debts, a financer may obtain some form of leverage or collateral against the loan, many times this takes the form of a lien. A mortgage is a type of secured loan, whereas the bank loans the borrower the money to purchase the home and if the home buyer stops making the mortgage payments the bank can repossess the home and foreclose, effectively taking the value of the loan back for resale. An unsecured debt is one with no item or property attached to it, most times is based solely on the borrower’s credit history and income. In all bankruptcy cases, the debt owed to secured creditors is the first to be paid off and at no point may a secured debt be discharged, or erased.

Chapter seven, also known as liquidation bankruptcy, is the most common type filed and is available to individuals, corporations and partnerships. In this scenario, the appointed trustee is responsible for selling off any non-exempt assets owed by the debtor in an attempt to pay the balances owed to the creditor/s. After all of the assets are sold, the remaining balance owed is discharged. Once bankruptcy is filed, any income earned is the property of the earner and none may be taken to pay the now-discharged debts, therefore, most businesses try to avoid filing chapter seven so they may retain the assets needed to produce further income.

The next type of filing is chapter eleven and is by far the most complicated and in-depth. Most troubled businesses seek this type of filing because it allows the debtor to remain in possession of their assets and consequently to continue to produce income. During the process of filing chapter eleven, the business must formulate a plan to reorganize their debt and develop a strategy to make payments to their creditors. While in the past many businesses dragged their feet in preparing a debt repayment plan, in recent years, the government has enforced the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which imposes a time limit of 120 days in order to file the reorganization of debt plan or the creditors are obliged to submit their own plans.

Chapter twelve filings are unique and differ from the others. In this instance, it is specifically designed to aid farmer owners in the payment of their debts while allowing them to retain possession of their land, farming implements, and other assets. Similar to the chapter twelve guidelines, this strategy gives the farm owner the opportunity to restructure their debt payment plans with their creditors without the threat of foreclosure.

The fourth and last bankruptcy option is known as chapter thirteen and is designed for individuals who wish to pay a portion of their outstanding debts while retaining control over their assets. In this scenario, the individual may reorganize their debt to be paid over a three to five year period.

Some of this debt may be discharged, however, the amount is determined considering the debtor’s income and there are limits on the amount of debt that is involved. These various types of bankruptcy options are in place to assist troubled individuals and business owners. Whether one is seeking to discharge all or a portion of their debt, wishing to remain in business while meeting their creditors’ terms for repayment, or simply to reorganize the structure in which they have agreed to repay a loan, there is an available option. Bankruptcy is considered a last resort option and it should not be undertaken lightly. It is important to explore all possible avenues of debt repayment before choosing the one that is best for the situation.

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