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    Explore 3 Main Types Of Bankruptcy For Crushing Debts

    Those who find themselves unable to pay their creditors can file for bankruptcy. This process provides immediate relief from any further collection efforts on the part of creditors against a debtor. This includes collection notices, calls, and wage garnishment. 

    The result of this process depends largely on the type of bankruptcy chapter filed. Whereas one type may conclude with the complete elimination of all debts, another type may simply restructure one’s debt in a more manageable format.

    The process also differs depending upon the filing party. The details for an individual, corporation, non-profit, government organization, and other organizations are all different. 

    The 3 Main Types Of Bankruptcy

    There are multiple types of filings, but three very common types of bankruptcy are traditionally explored by highly indebted parties.

    Chapter 7: Liquidation Bankruptcy

    A Chapter 7 filing is by far the most common type of filing for individuals. The goal for those filing under this chapter is the complete elimination of their debts, known as discharge.

    The process is fairly simple. Upon filing, creditors are forced to cease any collection efforts they’re currently pursuing against a borrower. Once the necessary fees and paperwork have been taken care of, the individual and their legal team meet with a court-appointed trustee that goes over the details of the case. Any assets that the individual owns can be sold in order to pay any secured debt they may have. Not all assets can be taken away from the borrower. In most cases, the court allows the filer to maintain their primary residence, primary vehicle (up to a certain value), the tools of their trade, and a few other assets. 

    Any unsecured debt, such as credit cards, personal lines of credit, and back rent will be fully discharged. It’s important to note that certain types of debt, such as student loans and taxes are not forgivable in a Chapter 7 procedure.

    Chapter 13: Debt Restructuring

    If the goal of a Chapter 7 filing is the discharge of debt, the goal of a Chapter 13 filing is the restructuring of outstanding debt balances. In a Chapter 13 Bankruptcy, the borrowers meet with their creditors and a court-appointed mediator. During this meeting, the two sides attempt to work out a restructuring agreement that would be acceptable to all parties involved. This can include partial debt forgiveness, increased payment terms, or lower interest rates.

    The entire process is contingent upon the creditors accepting the terms and it’s important to keep in mind that they’re under no obligation to do so. If such a deal is agreed upon, the court has the right to impose spending limits and a strict budget on the borrower. A Chapter 13 filing offers a much greater level of asset protection than a Chapter 7 and can also stop a foreclosure if certain terms are met.

    Chapter 11: Corporate Restructuring

    A Chapter 11 filing is for business and corporate restructuring and isn’t for individuals. It can also be used by businesses run as sole-proprietorships which record yearly income that’s too high to qualify for a Chapter 13 filing. 

    The type of companies that file Chapter 13 are ones that would have the potential to continue operating if their debt is restructured in such a manner. These types of bankruptcies can be quite complicated and have a much lower success rate than the two previously mentioned types.

    Type
    Chapter 7
    Chapter 13
    Chapter 11
    Who Can File
    Individuals and Businesses
    Individuals
    Businesses
    What Happen To Assets
    All non-exempt assets are sold to pay creditors
    Debtors can keep all property if appropriate agreement is reached
    In most cases non-essential assets are sold.
    Can It Stop A Foreclosure
    No, only delay the process
    Yes
    Yes
    Discharges Unsecured Debts
    Yes
    Most unsecured debt will be paid back over different terms
    Unsecured debts are restructured, not discharged outright.
    Time On Credit Report
    10 years
    7
    7

    Other Types Of Bankruptcy

    Beyond the most common consumer and business debt relief and restructuring formats, there are several other more specialized types of bankruptcy that relate to very distinct conditions.

    Chapter 12: Family Farmers And Fishermen

    Chapter 12 was developed in the 1980s as a response to the difficulties faced by fishermen and farmers. It’s similar to Chapter 13 but is less complex and offers higher debt limits. It also takes into account seasonal fluctuations in income and as a result, has a dynamic repayment plan.

    Chapter 15: International Bankruptcy 

    Added to the Bankruptcy Code in 2005, it’s an adoption of the United Nations Commission On International Trade Law (UNCITRAL). This type of filling gives foreign companies access to specialty US courts and is relevant should they have any major assets or debts within the country.

    Chapter 9: Municipalities

    Of all the types of filings on this list, Chapter 9 is the most obscure. It offers protection for municipal organizations such as hospitals, utilities, and school districts. The goal is the restructuring or refinancing of debt and, unlike a Chapter 7 filing, doesn’t result in the liquidation of assets.

    Conclusion

    Bankruptcy is a last resort option for those whose financial situation has deteriorated to the point that they’re no longer able to pay their creditors. It’s advised that individuals or businesses that are considering filing should always consult with a professional so that they can best understand the potential costs and impact of the process.