Types Of Bankruptcy - Which One Is Right For You?
Filing for bankruptcy in the United States has become clear-cut. In general, bankruptcy is identified as a legal proceeding wherein you voluntarily declare your inability to pay your debts, enabling you to stop or avoid paying your creditors either temporarily or permanently. On the other hand, your creditors may file a petition against you (involuntary bankruptcy), as a way of trying to recover a portion of what you owed them.
There are six types of bankruptcy provisions under the US Bankruptcy Code (Title 11: United States Code). Each type constitutes a different set of rules and laws, as detailed below.
(1) Chapter 7 - involves basic liquidation which is often used by individuals (also used by businesses). This bankruptcy provision primarily involves absolute liquidation of a debtor's assets to pay his/her creditors, clearing all debts to enable a debtor to have a 'fresh start.' However, there are certain properties which can be exempted from liquidation, such as tools of trade, limited car or house equity and other personal effects. But all these exemptions are all subject to the Federal Laws on bankruptcy of the state you live in.
(2) Chapter 9 - a bankruptcy provision only available to municipalities to reorganize communities. (3) Chapter 11 - primarily utilized by debtors for the reorganization or rehabilitation of business bankruptcies. This is also used by individuals who have large debts and assets. This type of bankruptcy lets businesses restructure themselves, giving them a chance to reorganize their debts and get out from under specific heavy contracts and leases. A business under this Chapter is generally permitted to continue their business operations, supervised by the Bankruptcy Court and its appointees. (4) Chapter 12 - primarily used to re-establish family farmers and fishermen. To qualify for this provision, families must have regular annual incomes to ensure that they can sufficiently make payments to their creditors after filing for bankruptcy. This bankruptcy plan also makes allowances for seasonal incomes, since farming and fishing are seasonal in nature. (5) Chapter 13 - this bankruptcy provision is usually applied to individuals with regular sources of income to enable them to follow a payment plan (usually for a period of 3-5 years). Debtors can also keep their assets on the condition that they allocate a portion of their future income as payments to creditors. The payment amounts and period are dependent on various factors such as the amount of regular income, expenses and value of a debtor's assets. (6) Chapter 15 - mainly dealing with jurisdiction issues, whereby bankruptcy proceedings from one country is connected to assets in another country. This bankruptcy provision also includes the United Nations Commission on International Trade and Law's Model Law on Cross Border Insolvency which provides solutions to cross-border bankruptcy problems. All these types of bankruptcy are clearly stipulated in the US Constitution, which in turn authorized Congress to standardize the national bankruptcy laws. You can consider these legal processes as your right to have a fresh start or giving you the chance of repaying your creditors when you finally have the capability to do so.
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