FINANCE

Bankruptcy is a legally declared inability or impairment of ability of an individual or organizations to pay their creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organization). There are six types of bankruptcy under the Bankruptcy Code, located at Title 11 of the United States Code:

• Chapter 7: basic liquidation for individuals and businesses;

• Chapter 9: municipal bankruptcy;
• Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets;
• Chapter 12: rehabilitation for family farmers and fishermen;
• Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income;
• Chapter 15: ancillary and other international cases.

 

The most common types of personal bankruptcy for individuals are Chapter 7 and Chapter 13. (As much as 65% of all U.S. consumer bankruptcy filings are of the Chapter 7 variety. Corporations and other business forms often file under Chapter 7 or Chapter 11.

Chapter 7 bankruptcy, sometimes call a straight bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtor has no assets that he would lose so Chapter 7 will give that person a relatively quick "fresh start".

One of the main purposes of Bankruptcy Law is to give a person, who is hopelessly burdened with debt, a fresh start by wiping out his or her debts.

Reasons people choose Chapter 13 instead of Chapter 7 bankruptcy.

Generally, you are probably a good candidate for Chapter 13 bankruptcy if you are in any of the following situations:

• You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. You may think filing Chapter 13 bankruptcy is simply the "Right Thing To Do" rather than file Chapter 7.
• You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.
• You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future. This would be the case if for some reason you can't stop incurring new debt.
• You are a family farmer who wants to pay off your debts, but you do not qualify for a Chapter 12 family farming bankruptcy because you have a large debt unrelated to farming.
• You have valuable nonexempt property. When you file for Chapter 7 bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you'd have to give up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option.
• You filed a Chapter 7 bankruptcy within the previous eight years. You cannot file for Chapter 7 again until the eight years are up.