Bankruptcy Basics: Six Basic Types of Bankruptcies

Seal of the United States bankruptcy court. Ch...

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There are six basic types of bankruptcies you can choose from to file, but you can only file one at a time. Each type of bankruptcy has legal statutes determining whether you qualify for filing that basic type. Each type gets is name from the “Chapter” in the bankruptcy laws in which they have been described. The six basic types of bankruptcy are:

  1. Chapter 7. This basic type bankruptcy is best known as liquidation of your assets. Once you petition the court to file, a bankruptcy court will orderly liquidate, or sell, your non-exempt assets and place the cash proceeds into the bankruptcy estate. The cash proceeds will then be used to pay off the unsecured creditors in priority order determined by federal law, up until the estate is out of cash. Debtors will get to keep exempt assets as determined by either state or federal bankruptcy laws. What unsecured debts have not been paid will be discharged along with non-reaffirmed secured assets.

  2. Chapter 13. This basic type of bankruptcy is commonly called the Wager Earner’s Plan. You must have regular income in order to qualify for a Chapter 13. Here, you will be required to make a plan to pay back your unsecured debts with disposable monthly income over a 3 or 5 year payout plan. The length of the plan is determined by certain guidelines involving median income for your area. You will also be required to pay Secured debts during the payment period and be up to date on your payments before there can be a discharge. Exemptions and priority both play a role in a Chapter 13.

  3. Chapter 12. This basic type of bankruptcy is often called the Farmer’s or Fisherman’s Bankruptcy because it is designed to provide relief for farmers and fishermen with a regular income. A Chapter 12 is very similar to a Chapter 13. The filer has to provide the bankruptcy court with a plan for 3 years unless the court extends the time up to 5 years. Secured and unsecured debts are handled in the same manner as a Chapter 13. Exemptions and priority both play roles in a Chapter 12. A Chapter 12 allows the fisherman or farmer to continue to work their business while the bankruptcy plays out.

  4. Chapter 11. This basic type bankruptcy is called reorganization. Primarily for businesses, the business is required to complete a court ordered plan to pay back a certain amount of their debt while the business is still in operation. The plan can be devised to pay back a portion of its debt, discharge others, or pay the debt in full. The debtor can terminate burdensome contracts and leases, recover assets, and rescale its operations in order to return to profitability. Filers of this Chapter normally go through a period of consolidation and emerge with a reduced debt load and reorganized business.

  5. Chapter 9. This basic type bankruptcy is primarily for adjusting the debts of Municipalities under a reorganization plan similar to a Chapter 11.

  6. Chapter 15. This basic type bankruptcy is called Ancillary and Other Cross-Border Cases and provides a mechanism for dealing with cross-border insolvency. A Chapter 15 deals with a debtor whose debts or property are subject to laws in the United States and one or more foreign countries.

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