Types of Bankruptcies: Chapter 7, 11 and 13 Easy Explaination

It is important to know the different Types of Bankruptcies if you are planning to file for bankruptcy. The bankruptcy code is divided into different chapters depending on the circumstances. Moreover, they can be interpreted differently depending on whether the applicant is an individual or a corporation.

What is Bankruptcy?

3 Types of Bankruptcies

Bankruptcy is a type of legally declared incapacity or limitation of the ability of a business or individual to settle accounts with its creditors. In most cases, legal entities or individuals decide to file for bankruptcy of their own free will in order to get rid of excessive debt. 

However, there are some cases where creditors can sign a petition that forces a person to go bankrupt in a final attempt to recover some of their losses, however this is relatively rare as in this case creditors will only receive a small portion of their investment, so this case of involuntary bankruptcy is usually intended for those who are unable to pay off his, her or her debtors.

Types of Bankruptcies

There are six main Types of Bankruptcies, each of which is used in different situations. These Types of Bankruptcies are divided into categories called chapters. These various Types of Bankruptcies include the following:

  1. Chapter 7 Bankruptcy

    Used for insolvent individuals and legal entities. They have no assets or income to pay off their debts. In the case of a business, all assets are sold and creditors receive a pro rata share of the debt that is owed to them. For individuals, all assets in excess of the exceptions permitted by law are transferred to the trustee and creditors receive their pro rata share of the assets.

  2. Chapter 9 Bankruptcy

    This is also known as municipal bankruptcy and is used as a federal mechanism for the involved rehabilitation and settlement of multiple or single municipal debts.

  3. Chapter 11 Bankruptcy

    This is used for business. This is commonly referred to as a reorganization. In this type of bankruptcy, the business develops a plan to stay in business while eliminating some or all of its existing debt.

  4. Chapter 12 Bankruptcy

    This is a very rare form of bankruptcy and is commonly used to rehabilitate fishermen or farmers who have lost some of their capital due to poor catches or harvests, among other reasons.

  5. Chapter 13 Bankruptcy

    Used for Personal Reorganization. In this type of bankruptcy, an individual, together with a trustee, develops a payment plan and makes regular payments to pay off existing debt over time. At the end of the payment plan, all old debt will be paid off.

  6. Chapter 15 Bankruptcy

    This is also known as subsidiary bankruptcy and is used primarily in international situations. It was created so that foreign investors and debtors have more opportunities to pay off debts that they cannot pay and cannot be held liable in the issuing country.

There are 3 main Types of Bankruptcies, understanding which is the key to successfully paying off debt. They all have their merits and demerits. 

So, you have to think about the 3 Types of Bankruptcies and how they will affect your life in the future in order to get the best possible outcome. Below are the 3 Types of Bankruptcies that can be filed: –

Basic Information about Chapter 7 Bankruptcy

Bankruptcy can be a litigation where the debtor declares that he has the funds to pay off the loan. A trustee is appointed to liquidate its assets and pay creditors. Chapter 7 Bankruptcy, also called bankruptcy liquidation, converts assets into money. 

Most debtors go to liquidation bankruptcy. The main goal of your bankruptcy is always to help the person overcome the financial crisis and create a new beginning financially. Only assets that are not exempt from tax are liquidated for settlements with creditors. When a person transfers asset to a trustee, he loses the right to give away or sell the house.

Each time a person files for Chapter 7 Bankruptcy, the Assistance Ordinance goes into effect. This can be called “automatic stop”. This suspension prevents creditors from harassing anyone at a commercial collection agency. 

This way, his salary remains safe from being written off. Creditors will also be prohibited from taking out the debtor’s car or property.

The newest federal bankruptcy laws, which came into force on October 17, 2005, have tightened the procedure for filing bankruptcy filings. According to the latest law, you need to pass a “test of funds”. 

The cash test calculates the debtor’s earnings and compares them to the average wage of a household of the same size in New Jersey. In the event that existing income is indeed found to be below average income, anyone is eligible for Chapter 7 Bankruptcy.

The total time it takes to pay off a Chapter 7 Bankruptcy debt is approximately 4 to 6 months. Every time a person chooses bankruptcy, he must pay a “filing fee” for the court clerk. That’s not including the cost of hiring a lawyer. 

If someone is planning Chapter 7 Bankruptcy, the amount they need to spend is $ 299. The step-by-step methods for Chapter 7 bankruptcy are actually as follows:

  • The debts of the person are analyzed
  • Asset exemptions are noted
  • The individual takes the means test to find out whether he qualifies or otherwise
  • The individual either can reaffirm or redeem his secured debts.
  • The individual files for bankruptcy
  • He files objections if required
  • He wraps up his secured debts
  • His debts get discharged 

Chapter 7 Bankruptcy: Educate Yourself Before you Decide to File

If you are thinking about filing for bankruptcy, you will have to speak to a lawyer to find out which process is most effective for you. 

However, you need to familiarize yourself with the options and chapters available before you decide to think about this path. Discover the basics of Chapter 7 Bankruptcy before you probably start filing.

Chapter 7 is the most frequent US entry and involves the transfer of all non-taxable assets to a trustee, who then converts them into cash so that creditors can be repaid. 

The purpose of this is to use a new financial start for your debtor, which should stop most of the assets, but has the advantage of being considered debt free afterwards. 

Aside from debt relief, another benefit is that creditors will need to stop contacting you after you submit your application. This means that you can eliminate the constant calls that bother you for cash, so the earlier you start the procedure, the higher the amount will be. 

The longer the situation can remain unchanged, the worse it will be; therefore, it is imperative to see a specialist if you suspect that you will not be able to return everything yourself.

This path is really popular because many people are deeply in debt and cannot control them. In fact, one of the many reasons for filing Chapter 7 Bankruptcy in this country is medical bills, which may be too high to cover. 

Sudden unemployment, divorce, runaway credit cards are typical other common benefits for filing. If there are or similar reasons, perhaps you are considering this path, you are not alone.

Chapter 7 Bankruptcy will remain in your personal credit history for 10 years, but eliminating the debt that may arise will likely save you enough money and worry about what every penny is worth. 

Initially, this affects your credit history, but when you get rid of the original debt, you can work to improve your rating again. He will literally think there is a new beginning. 

Needless to say, you will have fewer assets than before, but they will be able to retain certain tax-exempt properties that your lawyer can talk to you about in a little more detail. 

These professionals are trained to know which rents are exempt from foreclosures and which are not, so it is highly impractical to try to go through this technique on your own, as you could make a fatal mistake that would lead to a useless loss of very valuable property. 

In addition, some types of debts cannot be repaid by filing documents; for example, your kids, IRS debt and metaphorically speaking will watch one to the grave.

If you decide that Chapter 7 Bankruptcy is the best path for you personally, it will be decided if your attorney agrees. Once you’ve both decided on this method, you can start planning it. 

The sooner you apply, the sooner you will be free of debt, so it is recommended that you explore the various options before you decide to visit a lawyer.

Chapter 11 Bankruptcy

Reorganization (or Chapter 11 Bankruptcy): The business is allowed to continue while it works with creditors to create and implement a viable plan to return to financial health and profitability while paying off its debts. 

Chapter 11 requires the filing of a written disclosure statement and a reorganization plan so that creditors can form an informed judgment about the debtor’s reorganization plan.

Chapter 11 Bankruptcy Advantages

The business will get an “automatic stop” from the lender’s actions as soon as its files for bankruptcy. A company needs outside help when things get out of hand, in which case the bankruptcy court steps in and allows management to put their business in order.

An important advantage of bankruptcy for the debtor is the right to terminate the contract. It is the power to reject unfavorable contracts and leases and cancel certain transactions that are believed to have given an unfair preference to one lender over others.

Another advantage of bankruptcy is that creditors who disagree with the reorganization plan can be forced to accept it if the bankruptcy court decides to “bring down” the plan on those who disagree.

One of the explanations in Chapter 11 Bankruptcy is that in some cases the value of a business is higher if it is sold as a “going concern”, rather than the value of the sum of its parts if the business assets are to be sold separately.

Chapter 11 Bankruptcy Disadvantages

The disadvantage of filing for Chapter 11 Bankruptcy is reduced management control. While it is true that management can continue to direct the company’s operations, the US Trustee and the Bankruptcy Court will have the final say on the most important business matters. Chapter 11 Bankruptcy can also be very expensive, especially when it comes to professional fees.

Bankruptcy court judges and staff, US trustees, attorneys, and other bankruptcy professionals are key players in this process. Most of them are exceptionally professional and will do their best to keep businesses and jobs alive.

By saving a business, you can save jobs for a number of people in financial ruin.

Declaring Chapter 13 Bankruptcy

There are many Types of Bankruptcies that you can apply for if you are really taking a hard time making all the required payments in your account. Before deciding on a choice, the climax will get better if you first learn more about the options available to get a much better idea of how to work to your advantage. 

So, before we move on to the steps in Chapter 11 Bankruptcy, here’s a quick breakdown of how it happens: –

Basically, Chapter 13 Bankruptcy is a desirable alternative for debtors who have valuable assets, such as a house, car, or other property, that cannot be fully protected by benefits and that they want to keep. 

In the case described in Chapter 13 Bankruptcy, you present an idea showing how you can pay back some of your debt within 3-5 years.

So, if you feel that this choice may be the only solution you have left, and there are literally several other ways out of the situation besides declaring after that, below are the steps regarding how to declare Chapter 13 bankruptcy:

  • Petitioning: You will first need to file a petition with the bankruptcy court in your city. Together with the application, you must additionally submit a list of liabilities and assets, contractors’ contracts, lease agreements that have not yet expired, as well as income and expenses. Bankruptcy forms can be obtained from local office supply stores and will not be presented in court, so you will have to buy and fill them out. If you may have problems filling out the forms, contact your lawyer for help.

  • Pay the fees: Filing for bankruptcy will require a ransom for miscellaneous, as well as court fees to get things going. Once the petition continues, most of the lawsuits brought against you by your creditors are likely to be “put on hold,” which means they won’t be able to continue with litigation, demand wages, or harass you on the phone, and demand payment.

  • Submit a repayment idea: You can submit a repayment master plan with your petition or no later than 15 days after that.

  • Attendance at a meeting of creditors: this can be between 20-50 days after you file your petition, and your attendance at this type of meeting will be critical as it allows creditors to request and verify information about your assets other than your finances.

  • Confirmation hearing: This is how all your efforts will come down to being a bankruptcy judge who will determine if the repayment plans are feasible and meet all Bankruptcy Code standards.

Remember, while Chapter 13 does seem like a friendlier solution compared to Chapter 7, it will still hurt your credit history a lot, which explains why you need to exhaust all options first before even considering bankruptcy under Chapter 13 Bankruptcy

4 Most Widely Used Benefits When Filing Chapter 13 Bankruptcy Claims

  • Confusion in terms

Based on virtually every independent and academically relevant consumer survey in the United States of America over the past two decades, standard citizen borrowers – unless specifically given the opportunity to research a less popular alternative by a Los Angeles-based accountant or financial planner – don’t. 

I have no idea about the main difference between filing a Chapter 7 petition and filing a Chapter 13 lawsuit. Consequently, most Americans find themselves filling out Chapter 13 returns automatically only if they neglect eligibility. under Chapter 7 Bankruptcy, following the recently tightened requirements for participation in past reports of total household income.

  • History of borrowing

Currently entering Chapter 7 programs with sufficient concentration. If your loan file in the last 24 months shows any evidence of a desire to aggravate your financial problems (as well as consolidate existing debts; in other words, internally announcing your desire and faith in your strength to compensate to the credit community) these plans are without public shields) , you will need to file a Chapter 13 claim from the start than spend money on a Chapter 7 return.

  • Repayment history

Before submitting their listing of creditors for eventual liquidation under Chapter 7, most borrowers go really should be honor which they would first repay any debts owed with their nearest and dearest. 

Unfortunately, America Bankruptcy Code finds such distinctions being prejudicial and tantamount to fraud, and, for those who have satisfied any debts for your family or friends or coworkers (or, indeed, to 1 bank card balance while leaving other accounts delinquent simultaneously), the 2005 legislative clarification definitively states that this action would disqualify claimants from any hope of Chapter 7 Bankruptcy protection before the credit agencies show a 2 year period by which every one of the lenders, private and public, were treated equally. 

İt doesn’t matter what, even though it is simply reliant on cash payments for father and mother, you mustn’t still dissemble when filling in paperwork or conversing with the trustee on your brief meeting. 

The US government shall gain access to every one of the relevant bank records, in the end, and their financial investigators use a special knack for locating proof of inside deadlines seemingly impossible to follow. 

Better honestly, with the idea to wait the 24 months or perhaps bite the bullet and stretch your budget by filing Chapter 13 documents.

  • The automated stay

Needless to say, you can find people inside the United states of America that choose filing Chapter 13 bankruptcies from your beginning from the process. 

Property owners, primarily, whose monetary travails convey more related to secured debts for example mortgages or automotive loans which could not solved from the Chapter 7 discharge it’s still capable of taking benefit of the sudden cessation of foreclosure or repossession proceedings that bankruptcy necessarily features. 

This “automatic stay” is not going to stop all creditor actions – plus it certainly won’t provide any kind of long lasting solution when the borrowers don’t result in the new payments, as licensed by the court trustee together with lender representatives – but, for borrowers concerned about losing their homes and not able to maintain eligibility standards for refinancing, filing Chapter 13 Bankruptcy is possibly the only real significant kind of restraint they can arrange.

 

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