What Are The Different Types Of Bankruptcy?

Bankruptcy is a legal process that allows individuals, couples, and businesses facing financial distress to obtain relief from their debts. The U.S. Bankruptcy Code is divided into several chapters, each outlining a specific type of bankruptcy relief. Here are the primary types of bankruptcy available:

Chapter 7: Liquidation Bankruptcy

• Who it’s for: Individuals, married couples, and businesses.
• How it works: Chapter 7 involves the liquidation of non-exempt assets by a bankruptcy trustee to pay off creditors. It’s designed for debtors who do not have the financial means to pay back their debts. For individuals, this process can result in the discharge of most unsecured debts, such as credit card debt and medical bills.
• Key features: The process is relatively quick, typically taking about 4-6 months to complete. Not all assets are sold; debtors are allowed to keep exempt property, which varies by state.

Chapter 13: Wage Earner’s Plan

• Who it’s for: Individuals and sole proprietors with regular income.
• How it works: Chapter 13 allows debtors to keep their property and repay debts over time, usually three to five years, through a court-approved repayment plan. It’s suited for those with regular income who can afford to make monthly payments towards their debt.
• Key features: Debtors propose a repayment plan to make installments to creditors. Chapter 13 can stop a foreclosure and allow the debtor to catch up on missed mortgage payments.

Chapter 11: Reorganization

• Who it’s for: Businesses and, in some cases, individuals with substantial debts and assets.
• How it works: Chapter 11 allows for the reorganization of a debtor’s business affairs and debts while keeping the business operational. It’s most commonly used by corporations but is also available to small businesses and individuals under certain conditions.
• Key features: Debtors can propose a reorganization plan to keep their business alive and pay creditors over time. Chapter 11 is more complex and expensive than other types of bankruptcy.

Chapter 12: Family Farmer or Fisherman

• Who it’s for: Family farmers and fishermen with regular income.
• How it works: Similar to Chapter 13 but specifically designed to meet the needs of family farmers and fishermen, allowing them to restructure their finances and repay all or part of their debts.
• Key features: The debtor proposes a repayment plan to make installments to creditors over three to five years. Chapter 12 provides more flexibility in the plan terms to account for the seasonal nature of farming and fishing income.

Chapter 15: Cross-Border Insolvency

• Who it’s for: Foreign debtors, facilitating the handling of bankruptcy cases involving parties outside the U.S.
• How it works: Chapter 15 provides a mechanism for dealing with bankruptcy debtors, assets, and creditors that are subject to laws in more than one country, promoting cooperation between U.S. courts, parties, and foreign courts.
• Key features: It’s used to address cases of cross-border insolvency and to provide an effective mechanism for dealing with international bankruptcy issues.

Specialized Chapters (Not Commonly Used by Individuals)

• Chapter 9: Municipal bankruptcy, allowing cities, towns, villages, and other municipalities to reorganize their debts.
• Chapter 10: Obsolete, formerly involved corporate reorganization.
• Chapter 14: Proposed, not enacted, specifically for financial institutions.

Each type of bankruptcy serves different needs and comes with its own set of rules, procedures, and potential outcomes. Understanding the distinctions between these chapters is crucial for choosing the path that best aligns with an individual’s or entity’s financial situation and goals. Consulting with a bankruptcy attorney can provide valuable guidance tailored to specific circumstances.