Understanding the Different Types of Bankruptcy

Bankruptcy is something that no individual or company wants to go through, but the reality of the matter is that it happens more often than we would like. What many do not realize, though, is that there are distinct types of bankruptcy that can be filed. Which type you file relies on several factors, including whether bankruptcy is being filed on behalf of an individual or a corporation.

Chapter 7, also known as liquidation, is the most common type of bankruptcy filed by individuals and companies. To qualify for Chapter 7, debtors’ income must be below their state’s median income. This type of bankruptcy allows individuals and businesses to sell their non-exempt assets to pay off as much of their debt as possible. Any debt that remains after the liquidation process is dismissed. Unfortunately for companies that file Chapter 7 bankruptcy, they are unable to conduct business during the liquidation process.

Chapter 11 is most commonly filed by large businesses that need to develop a reorganization plan to pay off their debt. Companies are given a 120-day time limit to submit their plan before creditors can take matters into their own hands. A positive detail about this type of bankruptcy is that, unlike in Chapter 7, corporations are able to continue to conduct business throughout the process. However, Chapter 11 is a complex bankruptcy filing, which in turn means that it is also very expensive.

Chapter 12 is for farmers and fisherman. This category of bankruptcy allows those with regular incomes to come up with a plan to restructure their debt before creditors get involved in the process.

Chapter 13 bankruptcy makes it possible for individuals to reorganize their finances under the supervision of a federal bankruptcy court. Individuals remain in control over their assets, but they are not allowed to obtain any additional credit without receiving permission from the bankruptcy court handling their situation. A 3- to 5- year payment plan is also established to pay back creditors.

The term bankruptcy by itself does not mean a whole lot. It is important to understand which type of bankruptcy is being filed in order to have a more complete understanding of the financial situation.

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