There are several types of bankruptcy for which individuals or married couples can file, the most common being Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a chance to receive a court judgment that releases you from responsibility for repaying debts. You are permitted to keep key assets, considered exempt property, but non-exempt property will be sold to repay part of your debt. Property exemptions vary from state to state. You may choose to follow either state law or federal law, which may allow you to keep more possessions.
Examples of exempt property include your home; the car you use for work, equipment you use at work, Social Security checks, and pensions, veteran’s benefits, and welfare and retirement savings. These things can’t be sold or used to repay debt. Non-exempt property includes things like cash, bank accounts, stock investments, coin or stamps collections, a second car or second home, etc. Non-exempt items will be liquidated and the proceeds used to repay lenders.
Your assets will be sold by a court-appointed bankruptcy trustee. The proceeds go toward paying the trustee, covering administrative fees and, if funds allow, repaying your creditors as much as possible. Chapter 7 is the most popular form of bankruptcy.
Chapter 13 Bankruptcy
Chapter 13 bankruptcies make up about 30 percent of non-business bankruptcy filings. A Chapter 13 bankruptcy involves repaying some of your debts to have the rest forgiven. This is an option for people who do not want to give up their property or do not qualify for Chapter 7 because their income is too high.
People can only file for bankruptcy under Chapter 13 if their debts do not exceed a certain amount. The specific cutoff is reevaluated periodically, so check with a lawyer or credit counselor for the most up-to-date figures. Under Chapter 13, you must design a three- to five-year repayment plan for your creditors. Once you successfully complete the plan, the remaining debts are erased.
However, most people do not successfully finish their plans. When this happens, debtors may then choose to pursue a Chapter 7 bankruptcy instead. If they don’t, creditors then can resume their attempts to collect the full balance owed.
Different Types of Bankruptcy
- Chapter 9: This applies only to cities or towns. It protects municipalities from creditors while the city develops a plan for handling its debts. This typically happens when industries close and people leave to find work elsewhere.
- Chapter 11: This is designed for businesses. Chapter 11 is often referred to as “reorganization bankruptcy” because it gives businesses a chance to stay open while they restructure the business’ debts and assets so it can pay back creditors. This is used primarily by large corporations like General Motors, Circuit City and United Airlines, but can be used by any size business, including partnerships and in some rare cases, individuals. Though the business continues to operate during bankruptcy proceedings, most of the decisions are made with permission from the courts.
- Chapter 12: Chapter 12 applies to “family farms” and “family fishermen” and gives them a chance to propose a plan to repay all or part of their debts. The court has a strict definition of who qualifies and it’s based on receiving regular annual income as a farmer or fisherman. Debts for individuals, partnerships or corporations filing for Chapter 12 can’t exceed $4.03 million for farmers and $1.87 for fishermen. The repayment plan must be completed within five years, though allowances are made for the seasonal nature of both farming and fishing.
- Chapter 15: Chapter 15 applies to cross-border insolvency cases, in which the debtor has assets and debts both in the United States and in another country. This chapter was added to the bankruptcy code in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act. Chapter 15 cases start as insolvency cases in a foreign country and make their way to the U.S. Courts to try and protect financially troubled businesses from going under. The U.S. courts limit their scope of power in the case to only the assets or persons that are in the United States.