Choosing The Right Bankruptcy: A Guide To The Different Types

Bankruptcy has become a more and more prevalent problem in the United States over the past few years. In 2009, over 1,000,000 people filed for bankruptcy in the United States alone. That is just one of three considerable surges in bankruptcy filings since 1990.

Bankruptcy is often a necessity for many individuals and businesses that find themselves in financial distress. But, there are different types of bankruptcies, each of which comes with a set of benefits. If you’re not careful when choosing which bankruptcy to file, you could have more problems down the road, or even end up in jail. It’s crucial that you choose the right type for your situation.

Therefore, while looking for help deciding what type of bankruptcy is best for you, you need to gather more information on the possible options for your situation and their respective perks.

With this, we have put together this guide to help you with different types of bankruptcy. But, before that, you must understand the basic definition of bankruptcy.

Let’s take a look!

What Is Bankruptcy?

Bankruptcy is a legal process that allows individuals and businesses to eliminate their debts or repay them under the protection of the bankruptcy court.

In simple terms, bankruptcy is a way for people who are unable to pay their debts to get a fresh start by either getting rid of their debts completely or by creating a plan to pay off their debts over time.

When someone files for bankruptcy, they are asking the court to help them manage their debts. The court will then review the person’s financial situation and decide how to best resolve the debts. This could involve discharging (eliminating) the debts entirely, or it could involve creating a plan to repay the debts over a period of time.

What Are the Types of Bankruptcies?

The bankruptcy process can be complex and it’s important to understand the different options available and the consequences of filing for bankruptcy before making a decision. There are several different types of bankruptcy, each of which is designed to address specific types of financial situations.

In this section, we’ll explain the different types of bankruptcies.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as a “liquidation” bankruptcy, is a type of bankruptcy that is designed for individuals who do not have the income or assets to pay off their debts. Under Chapter 7, a bankruptcy trustee is appointed to sell off the debtor’s non-exempt assets in order to pay off creditors.

This process is called liquidation, which is why Chapter 7 is often referred to as liquidation bankruptcy. Most unsecured debts, such as credit card debt and medical bills, can be discharged under Chapter 7.

Who is eligible for Chapter 7 Bankruptcy?

In order to be eligible for Chapter 7 bankruptcy, the debtor must pass a means test, which determines whether their income is low enough to qualify. The means test compares the debtor’s income to the median income for a household of their size in their state.

If the debtor’s income is below the median, they are generally eligible for Chapter 7 bankruptcy. If the debtor’s income is above the median, they may still be eligible for Chapter 7 if they can show that they have enough expenses to justify it or can file for Chapter 13 bankruptcy instead.

What debts can be discharged in Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is a type of bankruptcy that is designed to eliminate most unsecured debts, such as:

• Credit card debt,
• Medical bills,
• Personal loans.

In a Chapter 7 bankruptcy, a bankruptcy trustee is appointed to sell off the debtor’s non-exempt assets to pay off creditors. Most unsecured debts can be discharged through the Chapter 7 process, which means that the debtor is no longer legally obligated to pay them.

However, certain types of debts cannot be discharged in Chapter 7 bankruptcy, including most student loans, child support payments, alimony, most tax debts, debts from personal injury settlements or judgments resulting from drunk driving, and debts resulting from fraud or other malicious actions.

It’s important to note that bankruptcy laws can vary from state to state, so it’s a good idea to consult with a bankruptcy attorney to determine which of your debts will be dischargeable in a Chapter 7 bankruptcy. Additionally, they will ensure that your chapter 7 bankruptcy petition does not get denied.

What are the drawbacks of Chapter 7 Bankruptcy?

While Chapter 7 bankruptcy can provide much-needed relief for individuals who are struggling with overwhelming debt, there are also some drawbacks to consider before deciding to file for Chapter 7 bankruptcy.

One potential drawback of Chapter 7 bankruptcy is that it can have a negative impact on your credit score. While bankruptcy can eliminate your debts, it will also remain on your credit report for up to 10 years, which can make it difficult to obtain credit in the future.

Another potential drawback of Chapter 7 bankruptcy is that you may have to give up some of your assets in order to pay off your creditors. The bankruptcy trustee will sell off your non-exempt assets in order to pay off your debts, which may include things like a second car, a vacation home, or other valuable possessions.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is for individuals who need to restructure their debt loads. It is a type of bankruptcy that is designed for individuals who have a regular income and want to repay their debts over a period of time. Under Chapter 13, the debtor proposes a repayment plan to the bankruptcy court, which must be approved before it can take effect. The plan generally lasts for three to five years, during which time the debtor makes payments to the bankruptcy trustee, who then distributes the funds to creditors.

One benefit of Chapter 13 bankruptcy is that it allows individuals to keep their assets, including their home, as long as they can make the required payments under the repayment plan. This can be a particularly useful option for individuals who are behind on their mortgage payments and want to catch up over time.

Who is eligible for Chapter 13 Bankruptcy?

In order to be eligible for Chapter 13 bankruptcy, an individual must have a regular income and their debts must fall within certain limits. Specifically, the debtor must have unsecured debts (such as credit card debt or medical bills) that do not exceed $383,175 and secured debts (such as a mortgage or car loan) that do not exceed $1,149,525. These amounts may be adjusted periodically to reflect changes in the consumer price index.

In addition to these debt limits, the debtor must also have sufficient income to make the required payments under the Chapter 13 repayment plan. The plan must be feasible and the debtor must be able to make the payments in a timely manner.

How does Chapter 13 Bankruptcy work?

Chapter 13 bankruptcy is a type of bankruptcy that allows individuals who have a regular income to repay their debts over a period of time, rather than having to eliminate their debts entirely.

Here’s an overview of how Chapter 13 bankruptcy works:

The debtor files a petition with the bankruptcy court, along with various financial documents and a proposed repayment plan.

The bankruptcy court appoints a bankruptcy trustee to oversee the case. The trustee is responsible for reviewing the debtor’s financial situation, collecting payments from the debtor, and distributing the funds to creditors.

The debtor begins making payments to the bankruptcy trustee as outlined in the repayment plan. These payments may be made on a monthly basis or in a lump sum, depending on the terms of the plan.

The bankruptcy trustee distributes the funds to creditors according to the terms of the repayment plan.

Once the debtor has completed the repayment plan, any remaining qualifying debts are discharged, and the debtor is no longer legally obligated to pay them.

It’s important to note that Chapter 13 bankruptcy is a complex process, and it’s important to carefully consider all of your options before deciding to file. It’s a good idea to consult with a bankruptcy attorney to get a better understanding of the process and to determine whether Chapter 13 bankruptcy is right for your specific situation.

What are the benefits of Chapter 13 Bankruptcy?

Chapter 13 bankruptcy can be a good option for people who are struggling with debt but want to keep their assets, such as their home or car.

Here are some of the benefits of Chapter 13 bankruptcy:

• Allows individuals with a regular income to repay their debts over a period of time, rather than eliminating their debts entirely.
• Allows debtors to keep their assets, such as their home or car, as long as they can make the required payments under the repayment plan.

• Can help individuals avoid foreclosure if they are behind on their mortgage payments.
• Can lower the interest rates on debts.
• Allows for the consolidation of debts into a single payment, which can make it easier to manage finances.
• After completing the repayment plan, most qualifying debts will be discharged, providing the opportunity for a fresh start and the chance to rebuild credit.

Before deciding to file for Chapter 13, it’s a good idea to consult with a bankruptcy attorney to get a better understanding of the benefits and drawbacks of it to determine whether it is right for your specific situation.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is commonly known as a “reorganization” bankruptcy. It is a legal process that allows businesses and other entities that wish to continue operating, but need a little more time to restructure their finances in order to pay the bills. It allows the debtor to continue operating while they develop a plan to repay their creditors.

Under Chapter 11 bankruptcy, the debtor remains in control of their business and is able to propose a plan to pay off their debts. The bankruptcy court will review the plan and, if approved, the debtor will be required to follow the plan and make payments to their creditors according to the terms of the plan. It is generally the most expensive type of bankruptcy proceeding, so debtors should carefully consider their other options before choosing Chapter 11.

Who is eligible for Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a type of bankruptcy that is available to businesses and individuals who owe more money than they are able to pay. In order to be eligible for Chapter 11 bankruptcy, a debtor must meet certain criteria, including:

The debtor must be insolvent, meaning that they owe more money than they are able to pay. This is generally determined by comparing the debtor’s assets to their liabilities, and determining whether the debtor has more debts than they are able to pay with their available assets.

The debtor must have a plan to repay their debts, either in full or in part.

The debtor must be able to demonstrate that they are acting in good faith and that they are not attempting to abuse the bankruptcy system. This means that the debtor must be willing to cooperate with the bankruptcy process and provide any information that is requested by the court or the bankruptcy trustee.

It is important for a debtor to work with a bankruptcy attorney to ensure that they are eligible for Chapter 11 bankruptcy and to understand the specific requirements that apply to their situation.

How does Chapter 11 Bankruptcy work?

The Chapter 11 bankruptcy process involves the following steps:

1. Filing a Petition: The debtor files a petition with the bankruptcy court, which initiates the bankruptcy case.
2. Appointment of a Trustee: The bankruptcy court appoints a trustee to examine the debtor’s financial affairs and ensure that the debtor is complying with the terms of the bankruptcy process.
3. Automatic Stay: When a Chapter 11 bankruptcy petition is filed, the debtor is granted an automatic stay. This means that creditors are prohibited from taking any action to collect or enforce existing liens against the debtor. It provides the debtor with some temporary relief from creditor harassment.
4. Debtor in Possession: In Chapter 11 bankruptcy, the debtor is known as the “debtor in possession.” They are responsible for managing their business and developing a plan to repay creditors.
5. Development of a Bankruptcy Plan: The debtor is required to develop a plan to repay their creditors over time. This plan must be approved by the bankruptcy court before it can go into effect.
6. Creditor Meetings: Creditors are given an opportunity to meet with the debtor and the trustee to discuss the debtor’s bankruptcy plan and any concerns they may have.
7. Plan Confirmation: The bankruptcy court holds a hearing to consider the debtor’s bankruptcy plan and decide whether to approve it. If it is approved, the debtor is required to make payments to their creditors according to the terms of the plan.
8. Discharge of Debts: Once the debtor has completed the terms of the bankruptcy plan, their remaining debts will be discharged, and they will be released from bankruptcy.

The Chapter 11 bankruptcy process can take several months or even years to complete, depending on the complexity of the case and the availability of assets to pay creditors.

It is important for the debtor to work closely with their bankruptcy attorney and the trustee to ensure that the process goes smoothly and that their debts are successfully discharged.

What are the benefits of Chapter 11 Bankruptcy?

There are several benefits to choosing Chapter 11 bankruptcy, including:

• Creditors must immediately stop all collection efforts.
• The business can continue operating under current ownership and management.
• The debtor-in-possession can borrow money on more favorable terms.
• The business can terminate burdensome leases and other contracts.
• The business may be able to sell encumbered assets to raise funds.
• The business may be able to emerge financially healthy after the bankruptcy process is completed.

Other Types of Bankruptcies

In addition to Chapter 7, Chapter 11, and Chapter 13 bankruptcies, there are several other types of bankruptcy available in the United States:

• Chapter 9 Bankruptcy: This is a type of bankruptcy that is available to municipalities, such as cities, towns, and school districts. It allows municipalities to restructure their debts and create a plan to repay creditors over time.

• Chapter 12 Bankruptcy: This is a type of bankruptcy that is specifically designed for family farmers and fishermen. It is similar to Chapter 13 bankruptcy, in that it involves the reorganization of a debtor’s debts and assets in order to repay creditors over time. However, Chapter 12 bankruptcy is only available to debtors who meet certain specific eligibility requirements, such as being a family farmer or fisherman and having a regular income from farming or fishing.
• Chapter 15 Bankruptcy: This is used in cross-border insolvency cases, where a debtor has assets in multiple countries. It allows a bankruptcy case in one country to be recognized and dealt with in another country, and it helps to ensure that the debtor’s assets are distributed fairly among creditors. It is similar to Chapter 11 bankruptcy, which is available to businesses and individuals, but it has specific provisions that are designed to deal with the unique challenges of cross-border insolvency cases.

Which Type of Bankruptcy Is Right for My Situation?

When deciding which type of bankruptcy to file, it is important to consider your financial situation and your goals.

• Chapter 7 bankruptcy is a good option for those with limited income and few assets who want to resolve their debts as quickly as possible. However, to be eligible for Chapter 7 bankruptcy, you must pass a means test to show that you do not have enough income to repay your debts. If you have too much income, the court may deny your Chapter 7 bankruptcy petition or convert it to a Chapter 13 bankruptcy.
• Chapter 13 bankruptcy is a good option for individuals who want to keep as many of their possessions as possible and have the income to support a repayment plan. It is also a good option for those who do not qualify for Chapter 7 bankruptcy.
• Chapter 11 bankruptcy is a good option for businesses that want to stay in operation and need time to restructure their finances. Check out its common Chapter 11 Bankruptcy Myths and Facts Behind Them

It is important to work with a bankruptcy attorney in Los Angeles to determine which type of bankruptcy is right for you. You can find a bankruptcy attorney through professional organizations such as the FLP Law Group LLP, or by getting recommendations from friends and family. If you are struggling financially, you may be able to find affordable legal help through your local legal aid society.

Last Words About Bankruptcy!

As we mentioned above, it is important to carefully consider all of your debt relief options before deciding to file for bankruptcy, as the process can be costly and time-consuming. To get the most benefit with the least amount of difficulty, it is essential to choose the right type of bankruptcy for your individual situation.

There are several types of bankruptcy available, including Chapter 7, Chapter 11, and Chapter 13. It is important to research and understand the differences between these chapters and select the one that best fits your circumstances. Filing for bankruptcy can have long-term consequences, so it is important to carefully consider all of your options before making a decision.