Bankruptcy is a legal process meant to give people a fresh start by relieving burdensome debts. In a Chapter 7 bankruptcy, for example, the debtor’s property is liquidated and the proceeds paid to his or her creditors. In a Chapter 13, on the other hand, the debtor creates a repayment plan and repays his or her debts in accordance with it. Once the bankruptcy process is complete, the filer typically is released from personal liability for most debts. Find introductory information on bankruptcy below, including a more detailed definition of bankruptcy, information on changes to bankruptcy laws, and the key distinctions between the most common forms of personal bankruptcy.
Bankruptcy: An Overview
Most people have some idea what is meant by the term bankruptcy, which refers to a legal process intended to help resolve debt issues for those who cannot afford to repay their creditors. However, fewer are aware of the many different kinds of bankruptcy permitted under the law or the effects that choosing one form of bankruptcy over another might cause. Kinds of bankruptcy are typically named for the chapter of the Bankruptcy Code that established them. Bankruptcies include:
- Chapter 7 - Chapter 7 Bankruptcy is also called "liquidation." In this form of bankruptcy most of the debtor's assets are sold and the proceeds are used to pay creditors. Whatever debts
- Chapter 13 - Chapter 13 Bankruptcy allows the person seeking bankruptcy to retain certain valuable assets such as their home and car. Instead they develop a plan to repay creditors over a longer period of time and the court determines whether the plan meets the requirements of the code. The debtor has any remaining debts discharged when they complete payment under the plan.
- Chapter 11 - Chapter 11 Bankruptcy is also called "Restructuring" and is a form of bankruptcy used by businesses that wish to continue their operations while repaying creditors.
- Chapter 12 - Chapter 12 Bankruptcy is quite similar to Chapter 13 bankruptcy except that it is intended specifically for businesses built around family farming or fishing.
- Chapter 9 - Chapter 9 Bankruptcy permits cities, towns, counties, school districts, and other municipalities to declare bankruptcy similar to Chapter 11 bankruptcies.
Chapter 7 vs. Chapter 13 Bankruptcy
Since they are intended to protect individuals; most debtors will be most interested in Chapter 7 and Chapter 13 bankruptcy. One threshold issue relating to eligibility for one or the other kind of bankruptcy has to do with the debtor's income level. Those with little or no income are eligible to file for Chapter 7, which is a simpler and quicker form of bankruptcy but also results in the liquidation of virtually all the debtor's assets. Chapter 13 may permit the debtor to retain some significant assets, but also takes considerably longer before those debts are discharged. If a debtor's income qualifies for Chapter 13 bankruptcy but they apply for a Chapter 7 bankruptcy the court may dismiss the case or convert it to a Chapter 13 bankruptcy. Significant differences also arise in bankruptcies involving:
- Mortgages and Car Loans
- Debts tied to Past Crimes
- Debts Owed for Child Support, Alimony, or Student Loans
- Nonsupport Debts Owed in a Divorce, Property Settlement, or Agreement
- Co-Debtors on Personal Loans
- Nonexempt Valuable Property
- Secured Property
- A Prior Bankruptcy
Articles linked here provide additional detail and it can be a wise decision to retain a skilled bankruptcy attorney to help you determine which form of bankruptcy can best help you resolve your debt crisis.