What are the various types of bankruptcy?
There are several different types of bankruptcy filings and each is known by the title of the chapter of the Federal Bankruptcy Act in which they appear. Each chapter contains a different set of laws and rules. The two most common types of bankruptcy are Chapter 7 and Chapter 13.
Chapter 7 is one of the most common types of bankruptcy used by individuals, but may also be used by businesses. This type of bankruptcy is the most severe. Under Chapter 7, a court-appointed trustee collects the individual’s assets. The trustee sells the assets for cash and pays the proceeds to the individual’s creditors. Assets that are exempt under federal or state law do not have to be liquidated. Once the Chapter 7 process is final, the filing cannot be repeated for six years.
Chapter 13 is designed for an individual debtor with a steady source of income. It can also be used by small businesses. Under the Chapter 13 plan, also called “individual reorganization,” the debtor must settle his debts over a three to five year period. Under Chapter 13, the debtor is allowed to keep his property. At a confirmation hearing, the court either approves or disapproves the plan. There are no time restrictions on when a Chapter 13 can filed.
Other Types of Bankruptcy
Chapter 11 bankruptcy is targeted to larger businesses, but individuals may also use this reorganization plan. Chapter 11 is similar to Chapter 13, but with more requirements. However, if all a debtor needs is a plan to pay off debts, then a Chapter 13 or Chapter 11 is preferable, rather than a Chapter 7, particularly when trying to reestablish their creditworthiness.
Chapter 12 is a voluntary bankruptcy designed for farmers and fisherman with steady income. However, there are exceptions for farmers and fisherman with seasonal income. This type of bankruptcy allows the debtor to establish a plan to pay off all or part of his debts over an established period of time. Chapter 12 is less daunting and less expensive than Chapter 11.