Understanding What Type of Bankruptcy Is Right for You

Which type of bankruptcy is right for you?

There are several types of bankruptcy that is available today in the United States, for consumers, businesses, and even government agencies. Here, I will discuss the different types, who qualifies, and what are the general, basic rules for filing that type of bankruptcy.

The first type, and most common type of bankruptcy is a Chapter 7. A Chapter 7 can be filed by an individual (of any marital status), married couple, or business. This case is simply a liquidation of assets that you, the debtor, owns. Your attorney will help you in completing the bankruptcy petition and schedules. They will need information about you, your spouse, your assets, debts, income and expenses. The liquidation part of the bankruptcy can take place before (by you selling some stuff), or can happen after you file your bankruptcy, by the bankruptcy trustee. The trustee would liquidate your non-exempt assets, and the funds would then be used to pay back creditors. The order that creditors get paid back is determined by the type of debt, and then by the trustee.

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There are some more specific bankruptcy codes that you would need to discuss with your attorney to determine if you'd be eligible for a Chapter 7, however most people in that file this chapter of bankruptcy are people/families/businesses that have lost their job/business due to unforseen circumstances (medical bills, layoffs, etc), and then could not afford basic necessities, and started running up credit card debt. Often what drives you to contact an attorney are that the collect agencies are continuously attempting to collect by calling you non-stop. If this is happening, it may time to seek some legal advice about what options are available for you.

The next type of bankruptcy I will address is a Chapter 9. A Chapter 9 bankruptcy is specific to the reorganization of municipalities, such as cities, towns, or other government districts (i.e. utility district, school district). A Chapter 9 bankruptcy is rare as it doesn't apply to individuals or commercial businesses.

A third type of bankruptcy is Chapter 11. A Chapter 11 bankruptcy is another type of reorganization, however it is mainly used for corporations and partnerships (although individuals may file this chapter, it's unlikely it would be in your best interest). This is not a liquidation of assets, rather it is when your business makes a plan to repay creditors and debts over a period of time. Chapter 11 cases are the most common type of bankruptcies that involve an involuntary petition filings as they creditors are forcing a business or corporation into bankruptcy in order to collect on their loans. Consult with your attorney on the specifics of a Chapter 11 if you are a business or corporation, as often there are larger companies that work solely in assisting in Chapter 11 bankruptcies.

Next is a Chapter 12 which is specifically designed and used for family farmers or family fisherman only. In my years of working with bankruptcy attorneys, I have never been assigned a Chapter 12 client.

A Chapter 13 bankruptcy is also very common for individuals, married couples and businesses. It is very similar to a Chapter 11, in that it is a reorganization and a plan is created to pay back creditors. The Chapter 13 has a limit of time - 60 months - that the debtor has to pay back. Both reorganization chapters of bankruptcy can be beneficial to save a house from foreclosure (for instance), whereas in a liquidation, a house may be lost/sold to pay creditors. A Chapter 13 plan will require that a debtors income is more than a monthly plan payment to creditors. It is up to your attorney to decide the priority of repayment and the Chapter 13 trustee will execute the plan, which includes collecting the monthly payment and distributing it to creditors. A Chapter 13 plan can often be seen as a forced budget for family or individual that has difficulty following a budget on their own.

The final type of bankruptcy is a Chapter 15. Chapter 15 bankruptcy is the newest type of bankruptcy, only added to the bankruptcy code in 2005. Chapter 15 is also rare (again, in all my years working in bankruptcy, I have never been assigned a Chapter 15 case). The Chapter 15 is described as an "ancillary" bankruptcy, and is often described as the International, or Cross-border bankruptcy. It is for clients who have assets, debts, or may live in, multiple countries, and filed in another country, but then followed by a chapter 7, 11, or 13 in the USA. Again, if you feel you may qualify for a Chapter 15, consult with an attorney.

All the information provided here is just the basics. There is a lot to the US Bankruptcy Code and it is best to consult with an attorney if you are considering bankruptcy. Always be honest and up front with your attorney as to what your assets and debts are. You can be held liable for any misinformation that you provide.

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