The 6 Different Types Of Bankruptcy In the US

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The economic downturn has put plenty of companies and individuals in difficult financial positions. Instead of trying to repay debts and obligations, more and more people are weighing bankruptcy as an option, seeing it as a mechanism that can wipe out or provide more control over their debts.

Donald Trump himself, who has famously filed for bankruptcy 4 times for his companies, is known to have said that the bankruptcy laws in this country have helped him tremendously. The process can either restructure the debts or wipe out specific types of obligations.

In the United States, Congress has enacted the Bankruptcy Code to govern individuals and entities filing for bankruptcy. Although each state has its own variations of the exemptions afforded to an individual or business, all bankruptcies must be filed in the
United States Bankruptcy Court in the federal district that you reside.

Typically, a debtor decides to file for bankruptcy to relieve themselves of the harassment of creditors and collection agencies, as well as restructure the repayment of their debt over a period of say, 5 years, depending on the type of bankruptcy.

There are the 6 types of bankruptcy under the Bankruptcy Code:

Chapter 7: This is also called straight bankruptcy. Assets of individuals and businesses are sold and used to pay existing obligations and other debts as closely as possible. Any remaining amount is then waived.

Chapter 9: This is a municipal bankruptcy and a way to resolve municipal debts. Not an option for individuals.

Chapter 11: Corporations file for this type of bankruptcy to rehabilitate or reorganize their debts. The company keeps their assets but have to restructure debts which in return makes repayment more manageable. This form of restructuring allows companies to continue with their business functions while making monthly payments for a period of 3 to 5 years.

Chapter 12: This bankruptcy is designated for family fisherman and farmers. Typically not a viable option for most people.

Chapter 13: This type of filing is designed for individuals with regular source of income that can develop a repayment plan to rehabilitate their debts. You must have money left over each month to cover a certain percentage of your debt. A chapter 13 is also known as Wage Earner Bankruptcy. This option is preferred when the individual owns assets such as a home, which cannot be not protected by exemption statutes.

Chap 15: This is for foreign debtors to settle their debts.

The common choice for most people is whittled down to Chapter 7 and Chapter 13, with most bankruptcies being Chapter 7.

What Is Exempted Property?

Exempted property refers to assets that a debtor is entitled to keep despite his bankruptcy filing. What this means is, that even though you are filing for bankruptcy and do not anticipate paying most, if not all, of your creditors ever again, you can still keep your car, your home, and that Breitling watch. At times, it can be confusing to remember the terms under bankruptcy exemptions. It is recommended that individuals and businesses consult with an attorney. An attorney can assist with the filing of all tedious and complex forms, filing the necessary pleadings, and attend court hearings on your behalf. There are many bankruptcy regulations that must be abided by or your petition will be dismissed.

Filing for bankruptcy is a long and complicated process. It would be in your best interest to seek the services of a bankruptcy lawyer who has the knowledge, experience, and expertise to help you succeed in filing a bankruptcy case.

What Bankruptcy Can Do For You

Now that we have discussed the different types of bankruptcies available to U.S. residents we will discuss the types of debts that are dischargeable in bankruptcy. Although bankruptcy is able to eliminate most debts, it does erase some. You can expect bankruptcy to provide the following advantages:

1. Debt that are unsecured debts, such as credit cards and medical bills, can be eliminated. Credit card obligations are not “secured” in the sense that there is no lien occupying the loan. For example, if you stop paying your credit card bills they will not be able to foreclose on your home or repossess your car.

2. Bankruptcy stops creditors and collection agencies from harassing you with their calls and collection procedures. Once your bankruptcy is filed, the creditors can longer contact you. The phone goes silent once they get notice of your filing.

3. Upon your failure to pay your bills, creditors may resort to initiating lawsuits and filing judgment liens against you and your property. Filing for bankruptcy may eliminate certain judgment liens and save your assets from being levied upon.

4. Bankruptcy can minimize your debt and give you a manageable repayment plan that puts you on the track to a clean debt-free state.

What Bankruptcy Cannot Do For You

1. Bankruptcy will not free you from paying child support and other alimony payments. Courts in the United States take domestic support obligations very seriously, and therefore under public policy reasons they are not dischargeable in bankruptcy.

These types of accountabilities survive bankruptcy in the sense that you will have continue making payment during the bankruptcy. If you are planning on filing for a Chapter 13 bankruptcy, these debts will be a part of your payment plan and any arrears must be paid in full within the specified time period.

2. Eliminate your student loans. Unfortunately, education loan obligations are not forgiven in bankruptcy. Unless you can prove that you find it almost impossible to live a decent life and that paying your student loans will cause you “undue hardship”, it is nearly impossible to get eliminate student loans through bankruptcy. You may, however, succeed in delaying or lowering your student loans through student loan modifications.

Please take note that it is extremely hard to meet this criteria and pursuing this will be very difficult even if you do qualify.

3. Remove your tax debts and other non-dischargeable payables

If you have failed to list a debt in your bankruptcy petition, then you can count on the debt not being discharged. Some of the other non-dischargeable debts include lawsuits filed against you for personal injury while driving under the influence of alcohol. If you have penalties and fines for violations such as those involving traffic tickets and criminal restitution, bankruptcy cannot eliminate them.

4. Remove court fines, legal penalties, or criminal offenses

These include DUI offenses, traffic offenses, and other kinds of misdemeanors. It is also worth noting that some debt will not be discharged if a creditor argues his case and convinces the judge that the debt should not be waived– such as debt accrued from fraud.

Applying for a Chapter 7 bankruptcy will keep these payables until the case is done. Filing for Chapter 13 would mean paying them in full during the repayment period. Additionally, some creditors might convince the judge that the debts you owe them should survive your bankruptcy. Filing for bankruptcy is a major decision and should be your last resort but it can definitely help you pay your debts and start fresh.