Differentiating Between Chapter Bankruptcy Types

In these difficult times, many people are facing financial difficulties that may be solved by any one of a number of chapter bankruptcy options. In fact, there are six types of bankruptcy, many of which are more appropriate for business bankruptcies. However, individuals and families commonly choose two. Knowing the benefits and complexities of each type can help a debtor determine if bankruptcy is the right solution, and which type to select.

Bankruptcy Chapters

The laws governing bankruptcy are found in the Bankruptcy Reform Act of 1978, and written into U.S. law in Title 11 of the United States Code. Within Title 11, there are chapters explaining the various types of bankruptcy. Those types are named after the chapter describing each. New reforms were enacted in 2005 in the Bankruptcy Abuse Prevention and Consumer Protection Act which govern bankruptcy today. The six types of bankruptcy include:

• Chapter 7 – or liquidation, which is directed by a trustee who may direct the filer to liquidate some of their nonexempt property, and who will ultimately determine which debts can be discharged, or erased

• Chapter 9 – or municipal bankruptcy, enables these entities to reorganize their debts rather than liquidate property to pay them

• Chapter 11, 12, & 13 – additional forms of bankruptcy reorganization, which allow the filer to retain their property while they compile a court-approved repayment plan. Chapter 11 is rarely used by individuals, while chapter 13 is common for most consumers who do not qualify for chapter 7. Chapter 12 applies to family farmer or family fishermen.

• Chapter 15 – bankruptcy option for foreign companies that have incurred unmanageable debts in the U.S.

Chapter Suitability

For most individual filers, chapter 7 and chapter 13 are the best options. However, determining the most appropriate type for each individual or family can be difficult. In general, these considerations are key:

• Chapter 7 is often the most appropriate for those with little property to protect. In addition, they often have little equity in the property they do own. As a result, when the bankruptcy trustee determines property liquidation, most of their property is exempt from liquidation under state or federal laws.

• Chapter 13 is generally more appropriate for those who have property they want to protect. In addition, that property may have considerable equity that could cause it to be sold under chapter 7 rules. This option is appropriate for those who have enough monthly disposable income to repay much of their unsecured debt, as long as they can formulate a repayment plan that fits within their budget.

Getting Legal Help with Choosing the Correct Chapter Bankruptcy

A financial advisor can provide essential assistance to debtors by analyzing their finances and advising them about their bankruptcy eligibility. However, a bankruptcy attorney is often required to ensure that the debtor completes all of the paperwork and provides all of the information the bankruptcy trustee and the court require. These are complex processes, and a bankruptcy petition can be dismissed if there are missing or incorrect elements. Such a ruling would prohibit the filer from attempting bankruptcy again for at least six months.