What Are the Types of Bankruptcy?

What Are the Types of Bankruptcy?

When people say they are filing for bankruptcy, it’s a given that they are financially in a rough place, but what are the types of bankruptcy and what does that mean? In this blog we’re going to look at the four types of bankruptcy, and what each of them means practically. Each type (Chapter 7, Chapter 11, Chapter 12, and Chapter 13) are named after the chapter they appear in in the United States Bankruptcy Code.

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Chapter 7

Avoid bankruptcy by being money smart and discovering your optionsChapter 7 bankruptcy is the most severe form, when a person (or corporation) has no hope of paying back most of what they owe. In this type of bankruptcy, an individual must sell as much of their property and assets as they can to try and pay off the debt.

“Exempt assets” (that is, property that a person does not have to sell in a bankruptcy) include necessities of life like clothing, an inexpensive car, basic furniture and appliances, tools necessary for a person’s job, some jewelry, and a portion of the value of their house. Some things that usually must be liquidated in a bankruptcy include collected antiques (including family heirlooms), second homes or vehicles, stocks, bonds and financial investments, and valuable items like musical instruments. The exact items that are exempt or not exempt depends on the state.
The debt that is not covered after all assets have been liquidated is forgiven, and a person can begin the long process of rebuilding a credit score.

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Chapter 11 and 13

In Chapter 11 bankruptcy, a business that is dangerous in debt must inform its creditors of all assets, and is given time to re-arrange its business and try to replay money. If the business that is in-debt has been managed badly, a new manager (called a “trustee”) may be put in place to see to it that the business is managed well. During the bankruptcy, the business cannot make any major changes like buying another business, selling off a section of its company, or expanding, without permission from the courts.

A Chapter 13 bankruptcy is when an individual, rather than a business, asks for time to re-organize their debts, but continues to own and manage their own property.

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Chapter 12

Specifically for farm owners, Chapter 12 bankruptcy again allows an owner time to re-organize debt, and begin to pay off creditors, while still owning and managing the farm.