The 4 Types of Bankruptcy

The Four Types of Bankruptcy

The goal of most personal bankruptcy is to cancel your existing debts and allow you a fresh start. If you are granted bankruptcy, you don’t have to pay the unsecured debts that you got yourself into before you filed your bankruptcy. But you are liable for all debts you run up after bankruptcy. The four chapters of bankruptcy are listed below, with the most common type first:

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Chapter 7 Bankruptcy

Liquidation, is the most common type of bankruptcy. Liquidation involves the appointment of a trustee, who collects the nonexempt property of the debtor, sells it, and distributes the proceeds to the creditors. Chapter 7 cannot be used to get rid of recent taxes, child support, alimony, student loans, drunk-driving judgments, criminal fines or restitution, or debts that involved fraud or intentional wrongdoing.

Chapter 7 involves liquidation of all non-exempt assets (usually sold by a court-appointed official or turned over to creditors) and the discharge of debts for exempt assets. [What is considered exempt and non-exempt varies between the federal and state governments, and state regulations may prevail over the federal.]

Chapter 13 Bankruptcy

If you have a regular income and unsecured debt less than $336,900 and secured debt equal of less than $1,010,650, this repayment plan is a practical type of bankruptcy. You will keep all property and make regular payments to the Chapter 13 trustee who will pay creditors off over three to five years. Repayment plans in Chapter 13 can range from 10 to 100 percent, depending on your income and the amount and kind of debt. Secured creditors, including fully secured first mortgages and possibly second or third mortgages, will continue to receive regular payments outside the plan. Certain debts that cannot be discharged in Chapter 7 can be discharged in Chapter 13, such as recent debt, criminal fines, and debt incurred by fraud. Chapter 13 also helps you prevent foreclosures and repossessions while catching up on their secured debts.

Chapter 11 Bankruptcy

If you own a business or corporation, Chapter 11 is a reorganization proceeding to consider. There are special circumstances you have to meet. Some individuals whose debts are larger than the limits of Chapter 13 may file Chapter 11.

In Chapter 11, the debtor usually remains in possession of assets and continues to operate any business, subject to the oversight of the court and the creditors committee. You propose a plan of reorganization to the creditors, who vote on it. If the majority accept it, your plan is confirmed by the court and becomes binding to you and your creditors. Plans can call for repayment out of future income or sales of some or all of the assets.

Chapter 12 Bankruptcy

Family farmers can take advantage of this simplified reorganization. Modeled after Chapter 13, Chapter 12 allows the debtor to retain all property and pay creditors out of future income.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affects whether an individual can file for Chapter 7 or Chapter 13 bankruptcy. The new law:

  • Includes a “means test” by which the IRS determines who can legitimately file for bankruptcy and who cannot. Those with lower income (under the median income for their state as cited in the table shown at the end of this bulletin) may file a Chapter 7 bankruptcy, which, if approved by a judge, erases debts entirely after certain assets are forfeited. Those with income above their state’s median income who can pay at least $6,000 over five years ($100 a month) would be forced to file Chapter 13, where a judge would then order a repayment plan.
  • Requires that people filing for bankruptcy pay for credit counseling.
  • Restricts a state’s homestead exemption to $125,000 if the person in bankruptcy bought his or her residence less than three years and four months before filing. [ Florida, Iowa, Kansas, South Dakota, and Texas have unlimited homestead exemptions that enable wealthy people to file for bankruptcy while keeping their mansions sheltered from creditors.]
  • Places the burden of proof for bankruptcy on the debtor’s lawyer, requiring the attorney’s signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid. While this may be a necessary step to ensure that claims are valid, it will also take more time and increase legal bills.
  • Broadens the definition of “nondischargeable” debts (meaning debts that can’t be erased through Chapter 7 filing) to include certain types of student loans, debts to state and local governments, and monies owed to “governmental units.”

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