If you’re planning to file yourself for bankruptcy in the US, you will find different types of Bankruptcy fillings that you can apply to. Which one is applicable for your personal case depends on the types of debts, loans and properties you currently hold.
Bankruptcy types for individuals in short
- Most persons file for Chapter 7, while Chapter 13 is also popular for individuals with higher earnings.
- The process of filing for bankruptcy and the requirements can vary from one state to another.
- The process attracts some fees, which also vary from one country to another.
U.S. Bankruptcy Code
The bankruptcy filing is found in several chapters of the U.S. Bankruptcy Code.
- Among these is Chapter 7 that provides for liquidation of assets.
- Chapter 11 deals mainly with businesses, but individual may apply in some rare cases.
- Chapter 13 deals with debt repayment plans.
Different Types of Bankruptcy Filings
There are six main types of bankruptcy filings in the United States:
Chapter 7 Bankruptcy
Individuals and businesses without assets can file for Chapter 7 bankruptcy. The chapter allows for the disposal of any unsecured debts such as medical bills and unsecured debts. However, individuals’ or businesses’ nonexempt assets, cash, or bonds must liquidate them to repay the unsecured debts.
Therefore, anyone filing for Chapter 7 bankruptcy must sell assets to clear the outstanding debt. However, debtors with exempt properties such as household goods do not repay the unsecured debts.
Chapter 9 Bankruptcy
Chapter 9 Bankruptcy can be filed by municipalities, counties and towns facing financial distress. This Chapter does not provide for the liquidation of properties to offsets debts. The federal courts have limited powers in the proceedings of chapter 9. The courts cannot force a municipality or town to liquidate.
Therefore, the role of the courts in Chapter 9 is to oversee a plan for debt repayment and its execution. Only municipalities can file for Chapter 9. The requirements of the chapter include the following.
- The municipality should get authorization from the state law to apply for Chapter 9
- The municipality must be insolvent
- The municipality must come up with a plan to adjust its debts
- There should be evidence of an attempt to negotiate and agree with the creditors
Before a municipality can file for Chapter 7, it must attempt to negotiate with creditors. Its main objective is to oversee a negotiation of a repayment plan between the city and its creditors. The plan can include reduction of principal or interest rate on the outstanding debt, extending the loan term, or refinancing the debt through the acquisition of a new loan.
Read also: History of bankruptcy in the US
Chapter 11 Bankruptcy
Mainly, the Chapter 11 Bankruptcy is filed by businesses and its main objective is to reorganize and gain profit. Once a business files for Chapter 11 Bankruptcy, it can come up with profitability plans, minimize costs and create ways of generating revenue. In such a case, common stockholders are not guaranteed payment, while the preferred stockholders are likely to get some fees.
Chapter 11 Bankruptcy allows businesses to continue operating as they’re working on a debt repayment plan. However, they are supervised by courts to ensure that their operations are not interrupted. Individuals can also apply for Chapter 11 Bankruptcy but in rare cases.
Chapter 12 Bankruptcy
This is a category of bankruptcy proceedings that deal with family farms and fisheries. The owner of the farm or fishery can continue owning it as he or she reorganizes funds. The debtor, together with the creditors and a bankrupt trustee, they come up with a repayment plan while the owner still holds the farm or fishery. Fisheries and farms that are owned individually or by corporations can file for this type of bankruptcy.
The U.S. government added chapter 12 bankruptcy law in 1986. It was a response to a crisis that was facing the farming industry in the 1980s. The law was set to expire in 1993, but it was extended. Later, it became a permanent law in 2005.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is also known as a wage earners plan. It is filed by individuals with high earnings to qualify for Chapter 11 Bankruptcy. The law provides for businesses and individuals with considerable revenues to establish a debt repayment plan. These repayment plans can be in terms of installments for three to five years. Debtors are protected since they can maintain all their property, including nonexempt properties.
Chapter 15 Bankruptcy
The Abuse Prevention and Consumer Protection Act of 2005 was added to become a part of the Chapter 15 Bankruptcy. Countries such as Japan, Canada and Mexico adopted the law to protect creditors and stakeholders dealing with international firms.
Its main objective is to create cooperation between the U.S. courts and foreign courts to oversee proper international insolvencies and bankruptcies. The law protects the debtor’s assets and also to ensure it rescues insolvent businesses. Therefore, it deals with liquidations where debtors and creditors are involved, and the case involves more than one country. It has the following objectives:
- Protecting the assets of debtor’s
- Helping companies with financial distress
- Creating a legal foundation for cross-border investment and trade
- Promoting cooperating between the US courts, foreign courts and other stakeholders involved in an insolvency
Choose the Right Bankruptcy Filing for You
Bankruptcy is a complex legal process that can have a significant impact on your financial future. If you are considering filing for bankruptcy, it is important to understand the different types of bankruptcy filings and which one is right for you.
Chapter 7 bankruptcy liquidates non-exempt assets to pay creditors. It’s the fastest and simplest type of bankruptcy, but not available to everyone. You must pass a means test to qualify. Chapter 13 bankruptcy allows you to create a repayment plan to pay off creditors over 3–5 years. It’s available to individuals with both secured and unsecured debts, but you must also pass a means test to qualify.
Chapter 11 bankruptcy is a reorganization bankruptcy for businesses and other organizations. It allows the debtor to continue operating while it develops a plan to repay its creditors. It’s a complex and expensive process, and not always successful. Chapters 12, 9, and 15 are more specialized types of bankruptcy for family farmers and fishermen, municipalities, and debtors with assets and creditors in multiple countries.
If you are considering bankruptcy, it is important to consult with an experienced bankruptcy attorney to discuss your options and determine which type of bankruptcy filing is right for you.