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The Different Types of Bankruptcies: Explained

Dec 14, 2022

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Bankrupt is always a last resort, taken only after all other options have been exhausted. But sometimes life throws you a curve ball and before you know it, you’re filing for Chapter 7 or Chapter 13 bankruptcy protection.

Bankruptcy is not something to be taken lightly. It can severely damage your credit rating and make it difficult – if not impossible – to get a loan or borrow money in the future. However, if you’re considering bankruptcy with no other option left, here’s what you need to know about the different types of bankruptcies available to you.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common type of bankruptcy filing. It's also known as a “liquidation” and allows you to eliminate all of your unsecured debts (such as credit card debt and medical bills). In the words of pros from Powell Associates, this type of bankruptcy requires that you liquidate all of your assets, which will be used to pay your creditors. After all of your assets are liquidated, the remainder of your debt will be discharged.

This type of bankruptcy also allows you to start fresh by wiping the debts and rebuilding the finances.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is also known as a “wage earner’s plan" and is a form of reorganization bankruptcy. It allows you to restructure your debt and create an affordable repayment plan, allowing you to pay off your debt over three to five years in smaller payments each month. These payments are determined by the court after considering your income and expenses. During this time, creditors will not be able to collect from you.

Additionally, if you have a mortgage or other secured debt, this type of bankruptcy can help you keep your property.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is mainly used by businesses (but individual debtors can also file for it) to restructure their debts and reorganize their operations. This form of bankruptcy allows corporations to create payment plans with creditors to free up cash flow to keep their businesses running and potentially turn a profit.

This form of bankruptcy is usually used for large, complex debt situations and requires a lot of paperwork and legal fees. For instance, businesses that are heavily in debt may need to reorganize their debts and operations to stay afloat.

Chapter 12 Bankruptcy

Finally, chapter 12 bankruptcy is specifically for family farmers and fishermen who are facing financial hardship. This type of bankruptcy allows them to reorganize their debts to make it easier for them to pay back creditors over three to five years. It also gives them the chance to keep their farms and other assets.

However, chapter 12 bankruptcy is a complex and expensive process and requires the assistance of an experienced attorney. Their legal advice and representation can help ensure that the court will approve the debtor’s repayment plan.

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Bankruptcy isn’t something to be taken lightly, but it can provide you with a fresh start if you’re facing financial hardship. No matter which type of bankruptcy you choose, it is important to consult a lawyer or financial advisor before making any decisions.

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Bankruptcy can be a difficult process with long-term consequences, so make sure you explore all of your options carefully.

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