Types of Bankruptcy Explained

You should know what types of bankruptcy are allowed by law and how each may or may not apply to your circumstances before you even consider filing in a court.

On this page you'll find a basic synopsis of each part of the bankruptcy code that might apply to your situation. One of these specific areas of the code will likely apply to you whether you are investigating filing a personal bankruptcy, small business, partnership, or corporate case.

Government documents and websites that discuss and answer a variety of bankruptcy questions always make the point that any bankruptcy is a complicated and technical court procedure that could adversely affect you should you make an error, miss a deadline, or not follow a procedure. You should always check with a qualified bankruptcy attorney before you make a final decision.

What is Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy, this is one of the most commonly used types of bankruptcy, is defined in the code as a liquidation of assets. It can be done by an individual, small business, sole proprietorship, or corporation. Basically a trustee sells your non-exempt assets and pays off creditors—you should be prepared to lose certain properties. Filing fees start at around $300.

A discharge of certain debts is usually attained in Chapter 7, but only for individuals, not corporations. Once a debt is discharged you are no longer liable for that particular debt. You should keep in mind, there is no guarantee of a discharge of debt in a bankruptcy filing but in Chapter 7 cases the likelihood of getting some discharge is very high. Two debts that won’t be discharged here are tax liabilities and student loans. Not everyone will qualify for a filing under this chapter since complex means testing is applied.

To start a Chapter 7 bankruptcy process you'd file a petition with the bankruptcy court in your area. You'd also need to supply information about your assets, liabilities, income, and expenses. Additionally you would need to supply certain tax returns, show proof of completion of credit counseling, and a copy of any debt repayment plan you made prior to the filing. Once the petition is filed a stay, which may be temporary, will stop creditors from taking further action against you on certain debts.

If you currently own property like an automobile or home you wish to keep and you're simply behind on your payments then a Chapter 7 bankruptcy is not for you. This section of the bankruptcy code does not relieve you of the responsibility of paying debt incurred with a secured loan. Loans on houses, automobiles, and certain other property is usually secured by the property.

Chapter 13 Bankruptcy Explained

This section of the code is designed for individuals who are earning income and wish to setup a repayment plan that will clear all or part of their debt over a 3 to 5 year period. While this plan is in place creditors are prohibited from taking any actions to collect debt. Filing fees start at $300.

In a Chapter 13 filing you effectively setup a debt consolidation whereby you pay a trustee every month and they distribute your money to creditors. By doing so you still must pay the full amount of your secured debt, you will however, likely avoid going to foreclose on any real property. This section also offers co-signers of certain consumer loans some level of protection from creditors.

A Chapter 13 process starts by filing a petition with the bankruptcy court in your area. You'd also need to supply information about your assets, liabilities, income, and expenses. Additionally you would need to supply certain tax returns, show proof of completion of credit counseling, and a copy of any debt repayment plan you made prior to the filing. Once the petition is filed a stay may stop both a mortgage foreclose and action against co-debtors.

Discharge of debt in a Chapter 13 filing is a complex issue and has been the subject to numerous revisions over the past several years. Debts that will not be discharged include a home mortgage, alimony, child support, student loans, and any debt owed based on a court ordered criminal case.

Chapter 11 Bankruptcy Definition

This section of the bankruptcy code is known as reorganization and is rarely used by individuals for a personal bankruptcy filing. Sole proprietorships, partnerships, and corporations normally use this section of the code when they wish to continue operations while they reorganize their debt obligations. When this section is used by a sole proprietor for a business reorganization both their business and personal assets will come into play. Filing fees start at $1000.

Chapter 12 Bankruptcy

One of the more obscure types of bankruptcy, this section is specifically designated for financially distressed family farmers and fishermen with regular annual income who wish to repay debt over a 3 to 5 year period. Chapter 12 is more streamlined, less complicated, and less expensive than a Chapter 11 filing. The code also takes into account the large capitol outlays and limited annual income that sometimes comes with farming and fishing. There is means testing for filing a petition under this section. Filing fees start at $300.

Before You Act

Keep in mind that state laws vary widely regarding the types of bankruptcy procedures to be followed. In some cases state law will prohibit the taking a certain assets like your home.

These are just short summaries of a few different types of bankruptcy options that may apply to your situation. You should consult with a qualified bankruptcy attorney prior to making any final decisions or taking any action toward a bankruptcy.