There are several reasons why people and companies declare bankruptcy. Keep reading to learn more about the main types of bankruptcy.
Studies show that over 77% of Americans feel worried about their finances. No one likes being in financial difficulty, but it’s always good to know your options when the worse comes to worst. There are many types of bankruptcy, but what are the differences?
Some types of bankruptcy deal with individual cases. Others are better sorted into organizations or institutions. A fair number of bankruptcy options are also pretty flexible and allow for repayment instead of liquidation.
For a guide on the different types of bankruptcy, read on.
Bankruptcy Types for Individuals
There are two types of bankruptcy that are the most common for individuals. These are Chapter 7 and Chapter 13 bankruptcy, and they operate differently.
Chapter 7 involves the substantial liquidation of assets. Chapter 13 involves the creation of repayment plans to avoid this kind of liquidation. We’ll go into some of the nuances in more detail below.
Chapter 7: Liquidation or Straight Bankruptcy
It can be challenging to know when filing for bankruptcy is the right thing to do. Chapter 7 covers cases of straight bankruptcy in which your assets are forcibly sold. This is how the court will expect you to pay off your debts.
This is the most common type of bankruptcy for individuals and is usually the one most people think of. The court will appoint someone as a trustee to ensure your assets are properly accounted for and sold. Many people believe that once this is complete, they are free.
This is only true up to a certain extent.
Most outstanding unsecured debts, like credit cards, get erased after liquidating what you can. However, there are some debts that US bankruptcy law doesn’t forgive. This includes owed taxes and student loans.
An attorney can help you navigate the requirements of qualifying for Chapter 7. Often, they can do this for a flat fee. The cliff notes are that you need to have an income low enough for the court to feel you can’t make any payments.
This income will depend on your state average; some states let you protect assets like homes or cars. It’s also worth noting that your credit history will keep a record of your bankruptcy for ten years.
Chapter 13: Repayment Plans
Repayment plans are a major option for individuals who are filing for bankruptcy. Under Chapter 13 bankruptcy, the government does not forgive any of your debts. Your assets won’t get liquidated, either.
Instead, the court reorganizes your debt. It does this by structuring your debt into more manageable repayment plans. The court agrees to a monthly amount based on your income and level of debt, with the aim of being square within five years.
While Chapter 13 might sound more appealing than Chapter 7, there is a catch. For one, the court can control your spending to ensure you meet your payments. They reserve the right to follow up on your finances to ensure you run a tight budget.
For many, this is a level of micromanaging or lack of privacy they cannot tolerate. However, under Chapter 13, you won’t lose your assets yet, which gives you a fighting chance. In addition, many people use Chapter 13 to buy time to restructure their mortgage or sell assets on their own terms.
To qualify for chapter 13, your secured and unsecured debt can’t exceed a certain number. This is about $1.25 million for secured and around $420k for unsecured debts. A Chapter 13 bankruptcy will also appear on your credit history for seven years.
There are four major types of bankruptcy that non-individuals can apply for. These are Chapters 9, 11, 12, and 15. They impact municipalities, large organizations, family agro-food businesses, and foreign cases.
We will dive into each one below, but it is worth noting that a good attorney can help you appeal bankruptcy.
Chapter 9: Municipal Bankruptcy
Chapter 9 is a common type of bankruptcy that only impacts municipalities. It functions like Chapter 13’s repayment plan model but for much larger institutions. City or town halls can declare Chapter 9 bankruptcy; the same is true for school districts.
Chapter 11: Large-Scale Reorganizations
When large organizations or corporations have severe money problems, they might declare bankruptcy. Under Chapter 11, the organization won’t dissolve or sell everything yet. Instead, they can devise a plan to reorganize themselves to the court’s satisfaction.
A large corporation would draft a detailed plan of the structural changes they plan to make. Their options include layoffs, salary and budget cuts, and downsizing. The onus is on the organization to pitch its new plan to the court and its creditors.
All is well if the relevant parties agree that the new plan lets the debtor make the payments. The organization can continue operating until they pay off its debts.
Chapter 12: Family Agro-Food Businesses
In some cases, family farmers or fishermen facing financial issues can apply for this one. Chapter 12 is a repayment plan option that helps protect vulnerable families. It stops them from having to sell all their farm and fishing equipment or losing their farm.
While it sounds similar to Chapter 13, there is a distinction. The debt ceiling is much higher, and repayment is more flexible here. It gives small family farms and fishing businesses the time to get back on their feet.
Chapter 15: Foreign Cases
Chapter 15 is a particular type that deals exclusively with international bankruptcy. This gets used by some foreign individuals or companies that have US debts. Often Chapter 15 is on a case-by-case basis, with an attorney being best positioned to explain the details of a particular case.
The Different Types of Bankruptcy
Understanding the different types of bankruptcy can help you better plan and manage your finances. Some are for very specific cases, while others give you options. That said, it always helps to have a solid team behind you to help navigate the intricacies.
At Johnson Turner, we have the experience and attention to detail that makes a difference. Contact us today to find out how we can help you.