Figuring out what kind of bankruptcy you’re supposed to file under isn’t easy, and figuring out which fits your situation best can be fairly tricky as well. Let’s take a look at the different ways that one can file for bankruptcy, and in what kinds of situations it would be appropriate to do so.
Chapter 7 :: Chapter 7 is the form of bankruptcy typically filed by private individuals who are drowning in personal debt. Filing under chapter 7 means that the government will liquidate your assets in order to pay off your debt (often by auctioning assets off for much less than they’re worth), and if the debt is not paid then you’ll be required to continue paying it off for several years before it can be canceled. Fortunately the law offers some protection in terms of how much of your income can be garnished to service those debts in the meantime. Even though Chapter 7 does give you a clean slate financially, it takes several years to really take effect and put you back on your feet.
Chapter 9 :: This type of bankruptcy is filed by government institutions like cities, school districts, or counties. Because they’re government institutions their assets can never be seized and sold off, instead bankruptcy offers temporary legal protection from creditors, giving the debtors time to reorganize their finances and develop a payment plan.
Chapter 10 :: This one is a little known type of bankruptcy used by small businesses. It allows a business to get court protection from its creditors so that it can continue to operate for a while in an attempt to generate enough income to service the debt. The company will be required to come up with a workable plan to pay off their debt within 3 years, and the payment will be supervised by the court
Chapter 11 :: This type of bankruptcy is used by large corporations and is relatively similar to chapter 10. Unlike Chapter 10 the “debtor in possession” or the owner of the business can maintain full control of their business without the interference of a court appointed trustee. Sole proprietors can also file for chapter 11, which allows them to maintain control over their assets and avoid liquidation, though it also requires them to develop a payment schedule that satisfies the court in order to do so.
Chapter 12 :: Chapter 12 bankruptcy is designed for family farmers and fishermen with a regular family income. Because debts by farmers and fishermen tend to be considerably larger, and income is less constant than in other businesses, chapter 11 and 13 often don’t work for them because their payment plans aren’t as flexible and they’re more expensive to implement.
Chapter 13 :: All individuals are eligible for chapter 13 bankruptcy. Chapter 13 allows individuals and sole proprietors to develop a regular payment plan to get out of debt with court protection to hold off creditors. The big advantage of this type of bankruptcy is that it allows individuals to avoid foreclosure on their homes and deal with delinquent mortgage payments.
This guest post was written by Alan Brady, a freelance writer with expertise in the law and family finances. Mr. Brady currently writes for Attorneys.com, which helps connect people with local mortgage and loan modification lawyers in the event that their home purchase didn’t go as planned.