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Types of Personal Bankruptcies
If you’re overwhelmed by consumer debt, you might be able to liquidate or reorganize certain debts to get relief. However, some debts, such as alimony, child support, certain taxes, and government-backed loans, cannot be included in a personal bankruptcy.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 bankruptcy involves liquidating certain assets to pay off as much debt as possible, with the remaining debt being discharged. Exempt assets vary by state but generally include clothing, home furnishings, retirement accounts, and a portion of your vehicle or home. To qualify, your monthly income must be below your state’s median income, or you must pass a means test. The process takes about four to six months, and the bankruptcy will remain on your credit report for 10 years.
Chapter 13 Bankruptcy: Reorganization
If you don’t qualify for Chapter 7 or want to minimize the impact on your credit score, Chapter 13 might be an option. This involves reorganizing your debt to allow for full or partial repayment over three to five years, with any remaining debt discharged. Anyone with less than $2.75 million in total debt is eligible. The bankruptcy will stay on your credit report for seven years.
Types of Business Bankruptcies
If you own a corporation, partnership, or sole proprietorship, there are three options for business bankruptcy. Filing for business bankruptcy typically doesn’t affect your personal credit unless you’re a sole proprietor or have signed a personal guarantee.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 for businesses involves ceasing operations and liquidating assets to pay creditors. This option is available to sole proprietors, partnerships, and corporations. The trustee may continue operating the business temporarily if it benefits creditors.
Chapter 11 Bankruptcy: Business Reorganization
Chapter 11 allows a business to continue operations while restructuring its debts with court assistance. Certain activities, like selling assets or taking on new debt, require court approval. This option is also available to individuals with significant debt who don’t qualify for other personal bankruptcies.
Chapter 13 Bankruptcy: Reorganization
Chapter 13 for small businesses works similarly to personal Chapter 13 bankruptcy and is only available to sole proprietors. Debts are reorganized based on income and ability to pay, with any remaining debt discharged after three to five years.
Other Types of Bankruptcy
There are specialized types of bankruptcy for specific situations:
Chapter 9 Bankruptcy
Designed for municipalities, this option provides protection while negotiating debt adjustments, such as extending maturities, reducing principal and interest, or refinancing.
Chapter 12 Bankruptcy
Available to family farmers and fishermen with regular income, Chapter 12 allows for debt reorganization and repayment over three to five years, with any remaining eligible debt discharged.
Chapter 15 Bankruptcy
This type recognizes a bankruptcy filed in a foreign country and promotes cooperation between U.S. and foreign courts, especially when financial interests in the U.S. are involved.
Is Filing for Bankruptcy Right for You?
Bankruptcy can provide relief from overwhelming debts but can also significantly impact your credit score. Consult with a bankruptcy attorney to evaluate your options. Individuals might also consider working with a credit counselor to explore alternatives like debt consolidation or a debt management plan. If you proceed with bankruptcy, monitor your credit to understand its impact and track your progress in rebuilding your credit.
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