There are different types of bankruptcy protection designated by the US. Bankruptcy Code under which a debtor may file. Each type of bankruptcy is named for the chapter it can be found under in the Bankruptcy Code. When a person says that they are filing for Chapter 7, they are really saying that they are filing for bankruptcy under the laws of Chapter 7 of Title 11 of the United States Code.
The most common types of bankruptcy:
Chapter 7: This involves the liquidation of only non-exempt assets in control of the debtor. If any assets are liquidated and money raised, the funds are used to pay creditors on a pro-rata basis based on their “priority” level in the bankruptcy system. A person can walk away from this type of bankruptcy with the items listed as “exempt” intact. The debtor is also authorized to keep any income earned after the bankruptcy was filed. This means that money earned after a person files for bankruptcy may not be used to pay the debts listed in the terms of the bankruptcy. Restrictions apply to individual debtors filing for chapter 7 protection. An individual must pass a “means test” before being approved to file for Chapter 7. Those who fail to meet the requirements may file under another type of bankruptcy. Chapter 7 is by far the most common, and typically, the most desirable type of bankruptcy for the debtor because it involves no repayment plan.
Chapter 11: Commonly applied to businesses, Chapter 11 allows businesses to continue to operate while paying off lenders under a court supervised and approved repayment plan. Business owners are allowed to reorganize their debts into a plan of their own design. A bankruptcy court will approve or disapprove of the business’ plan to repay. Chapter 11 can be beneficial because it allows a business to continue operating during the bankruptcy and also typically allows the debtor himself to remain in control and possession of assets.
Chapter 12: Chapter 12 applies to farmers and fishermen who earn regular income. Individuals who file under this chapter are allowed to maintain control of their assets while lenders are paid off according to a reorganized debt plan. The fact that the borrower in this case gets to maintain control of their assets means that the individual will be allowed to continue to farm or fish while debts are settled. The amount of assets a person gets to keep control of will be important when considering life after bankruptcy.
Chapter 13: Chapter 13 allows “wage-earning” individuals to restructure their debts and discharge the portion that can not be paid off in five years. Under this plan, a lender may be paid back the entire amount of the debt with interest or only paid back a small percentage of the original debt depending on the debtors financial circumstances. This plan is used by debtors who do not qualify for Chapter 7 filing or want to keep valuable assets that are not exempt.
Bankruptcy is an unfortunate life event that can take a toll on personal relationships, but with bankruptcy options to choose from, it’s safe to say that there’s a bankruptcy for everybody.
In all seriousness, a person should not fear filing for bankruptcy protection thinking that they won’t qualify or that the plan won’t help. The U.S. Bankruptcy Code offers many different bankruptcy options because it recognizes that every person has different financial circumstances. Also remember that considerations may be taken by the judge presiding over the case in bankruptcy court. Borrowers thinking of filing for bankruptcy should consult with an experienced bankruptcy attorney to determine which bankruptcy option would be the most beneficial for their particular circumstances.
Timothy G.McFarlin is an Attorney at McFarlin & Geurts with expertise in a variety of practice areas including real estate law, debt reorganization, bankruptcy, business litigation, and consumer law and mortgage litigation. Clients range from individual consumers to large national corporations.