Types of Bankruptcy

The different types of bankruptcy

So, you’ve exhausted all your options; you’ve tried everything you can, but you just can’t avoid going into bankruptcy. What you need to know is that you still have options. Even if you feel you have no choice but to declare bankruptcy, you still must choose what type of bankruptcy you want to declare. As a consumer, there are two types of bankruptcy which are most commonly used; these are chapter 7 bankruptcy and chapter 13 bankruptcy. Each type has its own advantages, disadvantages, and costs. Which type you declare depends on your specific financial situation.

The first option you have is a chapter 7 bankruptcy. This is what most people think of when you mention bankruptcy. Chapter 7 bankruptcy involves total liquidation of assets and is the most extreme of the available options. In this option, someone will be appointed to sell most of your assets and use them to pay your creditors. Some of your assets may be eligible to be claimed as exempt. All assets not labeled and exempt are eligible to be sold. Much of your debt will be voided if your are successful in filing for chapter 7; however, you should check ahead of time because there are several types of debt which are not eligible and will still have to be paid. The cost for filing chapter 7 bankruptcy is around $300 and can only be done once every six years.

Not everyone can file under chapter 7. You should file for chapter 7 only if you are incapable of paying back your debt. You must undergo a “means test” to determine you are truly incapable of paying back this money and therefore eligible to file for chapter 7. Also, if you make more money than the most people in your state, your creditors may request that your case be dismissed. If their motion is passed, you would not be allowed to file for this chapter of bankruptcy. Another case in which you would not be allowed to file this type of bankruptcy is if you had been found to have violated behavior outlined in the Bankruptcy Code.

The other common bankruptcy option for consumers is Chapter 13. Under this option, a person can work out a schedule to pay off all or part of their debt with future earnings. The time allotted to pay off the debt is 3 or 5 years, depending on the court’s decision. In this option, the debt is not cancelled; repayment is simply delayed. This option also allows you to keep your property and assets. The costs of filing for this type of bankruptcy are also around $300.

Similar to filing for chapter 7, Chapter 13 bankruptcy also has some restrictions. Just like Chapter 7, there are certain types of debt that are not eligible. You must have some sort of steady income to apply for chapter 13, otherwise you have no proof that you can pay off the debts within the allotted time period. There are also limits as to the size of the debt covered under this plan. If your debt is too large, you will not be allowed to file.

The two other types of bankruptcy available to consumers are Chapter 11 and Chapter 12. Chapter 11 is generally used by businesses as a way to restructure debt. This option is much more complicated and expensive than the other two and should only be used the Chapter 7 and Chapter 13 bankruptcies are not options. You should also discuss this option with a lawyer before you proceed. Chapter 12 bankruptcy can only be filed by those who own a farm or are fisherman.

These are the options available for you to file for bankruptcy; however, that doesn’t mean they are you only options. There are many alternatives to bankruptcy that you should research prior to filing.