What are the different types of bankruptcy?

There are several forms of bankruptcy. Each is designed for individuals and businesses in different financial situations.

Chapter 7

Chapter 7 Bankruptcy, also known as straight or liquidating bankruptcy, is the most popular bankruptcy and accounts for about 90 percent of all bankruptcies. It erases all debts except those that are non-dischargeable. Conversely, you’ll lose all your assets except those few assets that are exempt.

You can file Chapter 7 as an individual or business. A corporation, partnership, trust or any other entity may file Chapter 7.

When is Chapter 7 for you? If you have few non-exempt assets to lose, file Chapter 7. The big advantage of Chapter 7 is that your debts are forever extinguished. You start your life again debt-free.

Chapter 13

Chapter 13, or the wage-earner plan, lets you keep your assets but does not discharge your debts. You instead repay your debts in part or in full over three to five years.

Your repayment plan must pay creditors at least the amount they would receive under Chapter 7. Priority creditors, including taxing authorities, are usually fully paid. Secured creditors must receive an amount equal to the fair market value of their collateral.

Chapter 13 is your remedy if you have non-exempt assets to save, such as a home with a large equity. If you have no assets or only exempt assets, then Chapter 13 probably isn’t your answer. Chapter 7 lets you keep your exempt assets and fully eliminate your debts.

Chapter 11

Chapter 11 is similar to Chapter 13 in that it also allows the debtor to keep his or her property while arranging a repayment plan with creditors.

While a wage-earner plan is limited to employed individuals, Chapter 11 can be filed by any debtor. There is another important difference: Debtors in Chapter 13 cannot owe over $250,000 in unsecured debt and $750,000 in secured debt.

There’s no debt limit with Chapter 11. Farmers file Chapter 12, which is similar to Chapter 11.

Bankruptcies Can Be Converted

For example, a company may be involuntarily petitioned into Chapter 7 and convert their case to Chapter 11. Or a company in Chapter 11 or wage-earner in Chapter 13 may convert to Chapter 7.

This often happens when the debtor can’t negotiate a satisfactory repayment plan or defaults on other bankruptcy obligations. It’s important to select the right type of bankruptcy after consulting with an experienced bankruptcy attorney.

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