If you're in debt and considering bankruptcy, it's important to understand the different options available and how each type of bankruptcy works. The most common types that people file are called Chapter 7 or Chapter 13. Get privileged access to our best tools and financial content. At Bankrate, we strive to help you make smarter financial decisions.
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When you can't get out of debt without adversely affecting your livelihood, bankruptcy could be a consideration. Chapter 7 and Chapter 13 bankruptcies are the most commonly filed types of bankruptcy, probably because they are available to individuals. However, there are other types of bankruptcy that apply to companies, individuals and other entities. Here's What You Should Know About Each Bankruptcy Option.
The Bankruptcy Code includes five types of bankruptcy due in the U.S. UU. The sixth, chapter 15, deals with debt that covers more than one country). Each applies to a specific type of debtor.
Each chapter has its own objective, whether liquidation, in which certain assets are used to repay creditors, or restructuring, when a payment plan is created to pay off part or all of the debt owed. Chapter 7, also known as liquidation, allows individuals or companies to relinquish non-exempt assets and pay off most debts. To qualify, debtors must pass the income test, meaning their income must be lower than their state's median income. Not all debts can be settled, and forgiveness is not automatic in Chapter 7 bankruptcy.
People who successfully settle an eligible debt are no longer responsible for the debt. This section allows municipalities to reorganize debt. Whether you're a school district, city, or county facing financial difficulties, Chapter 9 bankruptcy allows you to restructure debt and create a plan without selling your assets. Municipalities applying for Chapter 9 can reorganize debts by reducing the interest rate on existing debt, reducing the amount of principal, extending the repayment period, or refinancing.
Also known as reorganization, Chapter 11 bankruptcy is for individuals and, more commonly, companies to restructure debt. It allows the taxpayer to draft a plan to repay a debt and, at the same time, retain assets. Companies that file for bankruptcy under Chapter 11 do not risk putting the personal assets of shareholders at risk, since the company is considered an entity separate from the shareholders. In a sole proprietorship, on the other hand, the owner and the debtor are the same person, so both personal and business assets are considered in a Chapter 11 filing.
Chapter 11 is much more complicated and therefore expensive, making it financially feasible mainly for very wealthy companies and individuals. Chapter 12 allows family farmers and fishers with regular incomes to reorganize the debt. Although it works similarly to Chapter 13, this option is more advantageous for farmers who have larger debts and do not meet Chapter 13's wage earner classifications. It's also simpler than the Chapter 11 process.
The reimbursement is usually extended over three years, but a court may also decide to extend the repayment period up to five years if it considers that this period of time is justified. Once the debtor complies with all the reorganization plan payments, the debtor's debt is canceled. Certain debts, such as child support or alimony, cannot be canceled through Chapter 12 of. As in Chapter 11, Chapter 13 is available to people who need to restructure their debt burden.
Some creditors will be repaid in full with interest, while others will have a percentage of the debt repaid. Usually, the repayment period is three to five years. Bankruptcy is a complicated process, so if you decide it's your best option, you should consult with a bankruptcy lawyer. Regardless of which bankruptcy chapter you file for bankruptcy, you must receive credit counseling from an approved agency within 180 days prior to formally filing for bankruptcy.
And remember, not all debts are canceled in the event of bankruptcy, so this option is not guaranteed to end everything you owe. Be sure to consult with an impartial bankruptcy or credit professional before going ahead with this life-changing decision. Chapter 7 bankruptcy is a liquidation procedure available to consumers and businesses. A debtor's assets that are not exempt from creditors are collected and liquidated (reduced to money) and the proceeds are distributed to creditors.
A consumer debtor receives full debt forgiveness under Chapter 7, except for certain debts whose forgiveness is prohibited by the Bankruptcy Code. Personal bankruptcies can also be filed under Chapter 11 of the Bankruptcy Code, but that's quite rare. Unlike other types of bankruptcy, Chapter 9 bankruptcy does not involve the liquidation and distribution of assets among creditors. .