What are the different types of Bankruptcy?
There are four different types of Bankruptcy, Chapters 7, 11, 12 and 13, based on their respective chapters in the United States Bankruptcy Code. The type of Bankruptcy one would file depends upon their status, as well as other factors.
An individual or business wishing to erase excessive secured and unsecured debt would file a Chapter 7. This is the most acute form of bankruptcy and is generally preferred when people have a lot of unsecured debt, and little or no property. Under a Chapter 7, all non-exempt assets are liquidated, unsecured debts are terminated and any secured debts are paid. If there are additional funds after the payment of secured debts, unsecured debts are then paid. In 2005, some changes to the Bankruptcy code were made and applicant must now pass a “means test” to determine their eligibility. In order to file Chapter 7, you must earn less than the average income of your state or, if you earn more, your excess income is insufficient to cover the cost of your debt AND repayment of 25% of unsecured debt over a 5 year period. Not all debts are discharged under a Chapter 7. Alimony or child support judgments and any state or federal tax owing are exempt. Also, if you own and keep your home and car, those payments must be made.
The most complex form of Bankruptcy is the Chapter 11. This filing is most often the type filed by large businesses who find themselves in excessive debt. An individual can file Chapter 11, however, it is generally considered more for corporations who will create a reorganization plan to pay back their creditors while the business itself continues to function. In a Chapter 11, the corporation or individual will retain control and ownership of all corporate assets during the course of the bankruptcy. Prior to the changes made in 2005 to the Bankruptcy code, businesses could take all the time they needed to reorganize and create a payment plan. Now, however, they are subject to a 120-day time limit by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and if they do not submit their plan within that time, their creditors can submit the payment plan.
The Chapter 12 Bankruptcy deals only with farm owners, who are able to own and control their own assets while they work out a payment plan with their creditors.
Finally, the Chapter 13 Bankruptcy is much like a Chapter 11, however, it is used by individuals or small businesses, who will still control and own their assets while repaying their debt. Generally, a three to five year repayment plan is created and a specific portion of their debt is discharged, based on the debtor’s income. Basically, the plan reduces the amount of debt and the amount of the payments due, in order to allow an individual to pay back their creditors within a certain time frame. This plan is preferable to a Chapter 7 as an opportunity for a debtor to pay back their debts rather than write them off, as it can make it easier to then reestablish credit. In order to be eligible, the debtor must have a regular source of income, less than $250,000 in unsecured debt and $750,000 in secured debt, and their debt must be for a fixed amount that is not subject to other conditions.
