Whether you are a business, an entrepreneur, or an investor, there will be moments in which the fear or risk of bankruptcy can be upon you. This fear can be overwhelming. As such it can be helpful to understand the different types of bankruptcy chapters and which one might be the best for you.
What Is Bankruptcy?
Bankruptcy is the financial state of when a person or a business can no longer pay their debts and must liquidate their assets in order to pay off their debts and start anew. Bankruptcy affects thousands of people and businesses every year and can be hard to recover from.
While for some individuals it may seem that bankruptcy can be a “get out of jail free card”, it must be realized that it is not and can follow you for the rest of your life. For example, a lot of people think that bankruptcy clears your student loans, government debts, reaffirmed debts, or even child support and alimony payments; unfortunately, it does not and it is a very common misconception.
What Are the Types of Bankruptcies?
There are six main forms of bankruptcies: (1) Chapter 7, (2) Chapter 9, (3) Chapter 11, (4) Chapter 12, (5) Chapter 13, and (6) Chapter 15.
Chapter 7, also known as liquidation or straight bankruptcy is the process in which a court-appointed trustee supervises the selling of your assets to pay off your creditors (those to whom you owe money). After the sale of all of your assets, any remaining debts that are not paid off (e.g., credit card debt or medical bills) are normally erased. However, a lot states protect some of your valuables from bankruptcy. For example, in Florida, even if you file under Chapter 7, the trustee cannot sell your home to pay off creditors. Chapter 9 is a bankruptcy that works like a repayment plan, which allows towns, cities, school districts, and the like, to reorganize and pay back what they owe during a specific time period.
Chapter 11 is the most common form of bankruptcy for businesses, like Chapter 7 is the most common bankruptcy for individuals. Chapter 11 allows you to reorganize a business or corporation and helps them operate in a way that allows them to stay in business and still pay off their debt. However, both the court and the creditors must approve of this plan. Chapter 12 is a repayment plan that allows family farmers and fishermen to avoid having to either sell all of their stuff or foreclose on their property.
Chapter 13 is similar to Chapter 7, however instead of forgiving your debts, you form a payment plan. The court normally approves a monthly payment plan so you can pay back a portion of your unsecured debt and all of your secured debt over a period of three to five years. The monthly payment amounts depend on your income and the amount of debt you have. Finally, Chapter 15 is a form of bankruptcy that deals with international debtors who have access to U.S. bankruptcy courts, normally because they owe money to U.S. creditors.
What Are Some of the Alternatives to Filing for Bankruptcy?
The process of filing for bankruptcy can be long and expensive; however, there are other alternatives that you can take in order to avoid bankruptcy and give yourself time to get back on your feet. Some of the most common recommendations are: (1) take care of necessities first, such as food, utilities, shelter, and transportation; (2) get on a budget, and stick to it; (3) boost your income in other ways besides your business; and (4) sell some of your valuables that may allow you to raise some money and pay your debts.