What Are the Different Types of Bankruptcy Chapters in the U.S?

What Are the Different Types of Bankruptcy Chapters in the U.S?

Everyone has heard the term bankruptcy before, but not everyone knows what it means and for whom it is intended. The U.S. Bankruptcy Code contains several chapters that focus on the different types of bankruptcy that individuals, businesses, and municipalities can file. Below, we will explain the definition of bankruptcy and what each chapter means.

What Is Bankruptcy?

Bankruptcy is the legal process by which federal bankruptcy courts help individuals and businesses eliminate all or part of their outstanding debts and repay a portion of what they owe.

While bankruptcy can help you get relief from your debt, it’s crucial to understand the serious, long-term consequences that declaring bankruptcy will have on your credit. It will remain part of your credit history for seven to ten years, and it will decrease your chances of getting approved for loans and open credit card accounts.

 

The Six Types of Bankruptcy Explained

Although the goal of bankruptcy is to generally clear you of debt, not all bankruptcies are created equal. Some are more suitable for individuals, and others are intended to help businesses and large organizations. There are six types of bankruptcy chapters in U.S. legislature. A chapter is a section of the Bankruptcy Code where the specific law is found. Let’s take a closer look at each of the six types.

 

Chapter 7 Bankruptcy: Liquidation

Also known as straight bankruptcy, Chapter 7 is the most common type of bankruptcy filed by individuals. The process consists of a court-appointed trustee who oversees the sale (liquidation) of your assets (anything of value that you own) to pay off the people you owe money to (your creditors). If there is any remaining unsecured debt (such as medical bills and credit cards), it is typically erased. However, Chapter 7 bankruptcy doesn’t cover all types of debt, such as taxes and student loans.

There are some states where the court won’t force you to sell basic necessities like your car, house, and retirement accounts under Chapter 7. However, there are no guarantees. Chapter 7 can only postpone a foreclosure — it can’t stop it. If you want to keep the things you still owe money on, you need to reaffirm the debt. This means you need to recommit to the loan agreement and keep making payments.

An important note here is that you can only file for Chapter 7 bankruptcy if the court decides that you’re incapable of paying back your debt. In other words, if your income is below the state average, the court will most likely allow you to file under this chapter (this is the so-called means test). Keep in mind that a Chapter 7 bankruptcy will stay on your credit report for ten years, and you can’t file for it again in the next eight years.

Learn more about Chapter 7 Bankruptcy

 

Chapter 13 Bankruptcy

Anyone can file for this type of bankruptcy if their secured debt is less than $1,257,850 and their unsecured debt is less than $419,275. Instead of forgiving your debt like Chapter 7 does (more or less), Chapter 13 reorganizes it. In this case, the court will approve a monthly payment plan for you to pay back all of your secured debt and a portion of your unsecured debt for a period of three to five years. The amount of your monthly payment will depend on your income and the debt you have. During that period, the court will check all your spending to ensure you’re following the strict budget they’ve put you on.

Unlike Chapter 7, Chapter 13 lets you keep your assets, and it allows you to catch up to any debt that is not considered bankruptable.  Learn More about Chapter 13 Bankruptcy

 

Chapter 11 Bankruptcy

In most cases, Chapter 11 is used by businesses and corporations. They will typically come up with a plan to continue operating the business while paying off their debt. Both the creditors and the court must approve this plan. In rare cases, it’s possible that real estate investors would file for Chapter 11 when they have too much debt to qualify for Chapter 13. 

Learn more about Chapter 11 Bankruptcy

 

Chapter 12 Bankruptcy

This type of bankruptcy is suitable for family farmers and fishermen who want to avoid foreclosure on their property or selling all of their assets. It includes a payment plan that, unlike Chapters 12 and 13, has higher debt limits and is generally more flexible.

 

Chapter 15 Bankruptcy

This type of bankruptcy deals with foreign debtors and international bankruptcy issues. Chapter 15 allows foreign nationals who have assets, business, or property in the U.S. to file for bankruptcy in the country. This is one of the newest types of bankruptcy added to the Bankruptcy Code in 2005.

 

Chapter 9 Bankruptcy

Chapter 9 is intended to help towns, cities, school districts, municipalities, etc. to reorganize their debt and set up a repayment plan to pay back what they owe. Under this chapter, municipalities earn protection from creditors while they set up the repayment plan.

 

Why You Need a Bankruptcy Lawyer

As with any legal case, working with a professional attorney can spare you costs, mistakes, and delays. For individuals who wish to file for bankruptcy, it’s not mandatory to have an attorney. However, if your Chapter 7 case involves valuable assets, or you want to file a Chapter 13 case, having a legal professional by your side can save you a lot of trouble. 

When you’re considering filing for bankruptcy, sitting down with your lawyer to consider your options and alternatives is crucial. Often, there is a smarter and more appropriate way to settle your financial situation that does not involve bankruptcy and the public scrutiny that comes with it. 

A skilled attorney will explain the different types of bankruptcy and the most suitable one for your case. They will also help with the preparation process, which typically includes applying the means test, valuing your property, choosing and applying for exemptions, and determining Discharge of Debts, among other things. They will help you during the case with your paperwork, negotiations with creditors, and offering sound advice along the way.

If you want to consult with an attorney in Bankruptcy Law, let Legal Chiefs help. We have a wide network of legal experts ready to take on your case! 

 

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Bankruptcy FAQ

Bankruptcy is a section of the law that allows debtors who are unable (fully or partially) to pay their outstanding debts to get a fresh start and get financial relief. Keep in mind that not all debts qualify to be removed in a bankruptcy case (e.g., student loans). The U.S. Supreme Court explains bankruptcy law as a way to give individuals and entities a new opportunity in life by starting fresh without the pressure and discouragement of preexisting debt. Federal bankruptcy law consists of chapters published in the Bankruptcy Code.
The U.S. Bankruptcy Law covers six different types of bankruptcy, each described in a separate chapter in the Bankruptcy Code. Although they differ in terms and procedures, their common goal is to provide permanent relief from certain outstanding debts. In other words, they help to discharge the debtor’s dischargeable debts. These are the different types of bankruptcy you can file: Chapter 7: This chapter provides liquidation of the non-exempt assets of the debtor. Certain assets, like a car or a home, may be exempt from bankruptcy, which means the debtor can likely keep them under this chapter. The court appoints a trustee who will oversee the debtor’s non-exempt assets and will handle their sale. The proceeds will go to the creditors. Chapter 7 is open both to individuals and businesses. Chapter 9: This chapter is intended to help municipalities to reorganize their debts. It is open to towns, cities, villages, municipal utilities, taxing districts, and school districts. Chapter 11: Intended to help partnerships and corporations, chapter 11 bankruptcy aims to provide a supervised reorganization of a business by allowing the debtor to keep running the business while following a court-ordered payment plan. Chapter 12: It consists of bankruptcy provisions for family farmers and fishers. Chapter 13: It is aimed at helping individuals with a steady regular income to create a repayment plan, usually within three to five years, and discharge the remaining dischargeable debt. Chapter 15: This chapter applies to cross-border bankruptcies that involve foreign parties.
Since bankruptcy can have a lasting negative effect on your credit, you should consider it a last resort option. It is a good idea to hold off on filing if you believe there is a chance to improve your financial situation or that you will have substantial expenses in the near future because there is a limit to how often you can file for bankruptcy. The moment you file for bankruptcy, this will trigger an automatic stay that will stop wage garnishment, lawsuits, foreclosure, and collection efforts. So, if you want to stop the repossession of your car or the foreclosure of your home, and you have the income to pay off that debt, it may be a good idea to file for Chapter 13, for example. Of course, you should ideally consult with a lawyer before you take any legal action. Is there a specific amount of debt to qualify for bankruptcy? Generally speaking, there is no preset minimum amount of debt you need to qualify for bankruptcy. However, certain debt limits apply to Chapter 13, for instance. The maximum amount changes constantly, but it currently is $383,175 for unsecured debt and $1,149,525 for secured debt. If your outstanding debt is relatively low, it’s wise to consider alternative solutions to bankruptcy to ensure that filing for one of the six chapters is still an option for you in the near future. It’s an important consideration because there are limits on how many times a person can discharge debts in bankruptcy.
It is possible, but it depends on the type of debt you have. Most consumer debt can be discharged in a bankruptcy case, but if you forget to include a debt in the process of filing, it will not be discharged. In addition to that, creditors have the right to object to the discharge of any debt. There are 19 categories of non-dischargeable debts that cannot usually be eliminated (unless a creditor decides not to challenge your effort to discharge them). Some of them include child support, alimony, certain tax debts, criminal restitution, and condo fee debts. Do I need a lawyer to file for bankruptcy, or can I do it on my own? It is allowed for individuals to file for bankruptcy without a lawyer. Debtors who decide not to use legal help in the filing process are responsible for understanding local court procedures and what relevant bankruptcy laws apply to them. In general, however, bankruptcy law is very complex and can be confusing. Understanding the process is key, and it is a good idea to consult with a bankruptcy lawyer about your circumstances to ensure you get the best outcome.
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