Which Type Of Bankruptcy Should You File?
There are quite a few types of bankruptcy to choose from. In the USA, they are referred to as chapters. The name comes from the book of bankruptcy rules that people have to follow if they wish to go bankrupt. The different chapters apply to different people, businesses and entities, so here is a run down of each so that you may pick the one that best suits your circumstances and situation.
Chapter 13 Bankruptcy
Voluntary Debt Reorganization For Individuals
You have to be self employed, a wage earner, or a sole trader/proprietor in order to file for chapter 13 bankruptcy. You must have a regular income, and have correctly filled out your tax returns within the last four years. Chapter 13 bankruptcy gives you a fresh start where you may stop incurring extra fees and debts, and where you are protected from creditors taking action against you. In some cases, you are able to keep a big or valuable asset such as your house. You have to create a repayment plan and pay back as much of your debt as possible within a five-year period.
Chapter 11 Bankruptcy
A Reorganization Of Your Debts
If your debt exceeds the maximum limit for chapter 13 bankruptcy, then you may file for chapter 11 bankruptcy. Chapter 11 is usually reserved for businesses, which includes individuals who are the sole proprietor of their own business. A five-year plan is created where the debtor is able to influence the amount being paid out on a monthly and weekly basis to bring it down to a level that the debtor can afford. Some debt is discharged after the five-year plan has run its course, but the idea is to repay as much debt as possible. The debt is reorganized so that the payments are affordable every month and/or week.
Chapter 7 Bankruptcy
Liquidation Under the Bankruptcy Code
If you run a business, then your business may file for chapter 7 bankruptcy and close down (terminate) in order to liquidate any assets and repay as much debt as possible. An individual may file for chapter 7 bankruptcy and liquidate his or her assets in order to pay off his/her debt, but the individual has to prove that he/she cannot afford his/her monthly/regular debt payments. All of the debtor’s assets are liquidated with the exception of a few things such as clothes, wedding rings, and things of that nature. Everything else is liquidated to pay off any outstanding debt, and whatever is not paid off is discharged (wiped clean) after the case/proceeding has completed.
Individuals with any amount of debt may apply for chapter 7, whether he or she is solvent or not. However, a judicial district judge is more likely to disprove/dismiss a debtor’s petition if the debtor is solvent and clearly able to afford his or her debt repayments. Take note that as of 2005, it has become more difficult to file for chapter 7 bankruptcy, and let’s not forget that chapter 7 is the easiest form of bankruptcy you can file for. The 2005 US amendments to the rule of bankruptcy have made is harder for people to abuse the US insolvency process.
Chapter 9 Bankruptcy
Adjustment Of Municipality Debts
Chapter 9 bankruptcy refers to the section of rules that is used to adjust the debts of a municipality. It is the code used when counties, towns, cities, school districts and taxing districts wish to go bankrupt. As you can imagine, it is not a regularly used chapter when compared with the other bankruptcy chapters in this article, but it has been used frequently enough to worry knowledgeable Americans. The five biggest municipal bankruptcies in U.S. history are:
(2013) Detroit, Michigan
(2011) Jefferson County, Alabama
(1994) Orange County, California
(2012) Stockton, California
(2012) San Bernardino County, California
California was actually doing quite well during the time that Arnold Schwarzenegger was in charge. After him, there were two years of democrat rule, and California had to return to the insolvency courts twice. A municipality is limited as to what it can and cannot liquidate. After all, they cannot go around ripping up the lampposts to sell off the scrap metal. That is why the purpose of chapter 9 bankruptcy is to give a financially-distressed municipality the protection it needs from its creditors, so that a plan may be developed, negotiated and enacted. The plan should help the municipality repay its creditors without falling further into debt.
Chapter 12 Bankruptcy
For Family Fishermen And Family Farmer
If you run a farm as part of a family business, or you run a fishing business as a family business, then you may file for chapter 12 bankruptcy. It is heavily implied that if you continue as a farmer or angler, then you have an income. That is why chapter 12 is called an adjustment of debts. A payment plan is set up that allows the debtor to remain in business, and then using all other disposable income to repay the debtor’s debts. The debts are reorganized to ensure that the repayment installments are affordable. Some debts may be discharged when the bankruptcy case is closed, but the aim is to help the angler/farmer repay as much as possible while allowing him/her/them to stay in business.
Chapter 15 Bankruptcy
For Foreign Representatives
In 2005, the US bankruptcy code and rules were changed, and chapter 15 was added to the code. Chapter 15 is the part of the book of rules/code where the Model Law on Cross-Border Insolvency is present and adopted by the US. The model law is promulgated (declared officially) by the United Nations Commission on International Trade Law. The Model law (and chapter 15) was put in place to create effective mechanisms for cross-boarder and overseas bankruptcy and insolvency cases. For example, there are times when debtors, claimants, other parties and assets are based both nationally and internationally.
How To File For Bankruptcy
We have created and published an article on how to file for bankruptcy. It doesn’t give you details on how to fill out the forms, but it gives you an idea of what to expect and it explains the process as plainly as possible. The whole point of our series about insolvency is to present the information in a plain and simple way that anybody can understand and use. Picking the most suitable chapter is not your biggest or most difficult decision, so it is in your interest to learn as much about going bankrupt in the USA as possible before you start making any decisions.