If you are considering filing for bankruptcy, chances are you are already stressed and confused as to which direction to go. There are multiple different routes you can take, and each one depends on your unique individual situation.
Bankruptcy categories are classified by “chapters,” so to determine which chapter is right for you, you need to understand what each one means so you can decide whether you file for Chapter 7, 9, 11, 12 or 13.
Chapter 7 – Liquidation
The most commonly known bankruptcy is Chapter 7, also known as “liquidation” or “complete bankruptcy.” This type of bankruptcy basically takes the debtor’s excess assets (anything considered “nonexempt”) and liquidates them into cash. This cash is then used to pay off the creditors in accordance with the bankruptcy law.
A Chapter 7 bankruptcy should be filed if you have no chance of paying off your debts or if your creditors are about to take court action against you.
Chapter 9 – Adjustment of Debts of Municipality
This type of bankruptcy is rare and only applies to a municipality. In this type of bankruptcy, cities, towns, counties, school districts, etc., may file for Chapter 9, which gives them the opportunity and expectation to propose a payment plan to pay off their debts.
Chapter 11 – Reorganization
If you own a commercial enterprise that is massively in debt and you want to continue running your business but need assistance in repaying your creditors, you may wish to file a Chapter 11 bankruptcy. This type of bankruptcy allows you the right to file a plan of reorganization in which you provide your creditors with a disclosure statement of your plan. They are then allowed time to evaluate it. The court has the final say on approval or disapproval, however.
Your options under a Chapter 11 Reorganization bankruptcy include repaying a portion of your debt and discharging the rest, discharging contracts and leases which are too difficult to repay, and adjusting the operations of your business to fulfill your debts.
Chapter 12 – Adjustment of Debts of a Family Farmer with Regular Income
Another less common type of bankruptcy, Chapter 12 offers a form of debt relief to farmers who have an annual income but are having difficulty repaying creditors. In a Chapter 12, a repayment plan is proposed in which the debtor has three to five years to repay their debt while still operating the farm.\
Chapter 13 – Adjustment of Debts of an Individual With Regular Income
Chapter 13 is another common form of bankruptcy in which a person with a regular income source wishes to repay their debts but is currently having a difficult time doing so. In this case, assets are protected in exchange for a court approved plan that demonstrates how the debtor will repay their creditors within a period of three to five years.
Through a Chapter 13 bankruptcy, the creditors receive payments from the debtor through a trustee, while the debtor is protected against adverse actions such as lawsuits, wage garnishments, and foreclosures. Once the plan is completed, debts that remain are discharged.
This type of bankruptcy is often used when you have liens that outweigh the value of the assets that secure them, or if you have multiple years of unfiled tax debt, numerous mortgage or car payments overdue, or debts that are not dischargeable through Chapter 7 bankruptcy.
Is Bankruptcy Right For You?
If you are considering filing bankruptcy, you should speak with an expert attorney in this field before you make a decision. Your attorney can guide you along the process and get you the help that you need during this difficult time.