For many, bankruptcy is the last option for eliminating overwhelming debt. Because bankruptcy leaves a long lasting (10 years) mark on credit histories and scores, it is only advisable to go into it knowing all of the details and the consequences. It is recommended that you speak to an attorney before going forward with a bankruptcy filing. Understand that bankruptcy will limit your abilities to borrow money or get credit in the future. It should be considered a last resort to debt elimination and should be understood that bankruptcy is not the easy way out of debt. Bankruptcy courts can make the decision as to whether or not you are eligible to file. Again, bankruptcy is a major decision that should not be taking lightly.
There are four basic types of bankruptcy we will discuss here as it relates to personal finance.
Types of Bankruptcy
This type of bankruptcy is essentially a liquidation bankruptcy, meaning that all non-exempt assets of the debtor are sold in order to repay as much of the debt as possible. Whatever can not be paid through the liquidation will be discharged. Chapter 7 bankruptcy can be used by individuals, partnerships, and corporations. Typically businesses will refrain from filing Chapter 7 because they will no longer be able to conduct business as usual.
This type of bankruptcy is the most complex of all bankruptcies. Both businesses and individuals can file for this type of bankruptcy, though it is most common for businesses to file. During a Chapter 11 bankruptcy, you continue maintain control of your assets but you will be involved in a reworking of your debts in attempt to pay off creditors in full. In the past, debtors had an unlimited amount of time to repay the debts but after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, debtors must submit a reasonable repayment plan with 120 days or risk having the creditor submit their own plan for repayment to the bankruptcy court.
This type of bankruptcy is specific for farmers. They can file bankruptcy but retain control of their assets while working through a creditor repayment plan to pay off all debts.
This bankruptcy is similar to Chapter 11 but it is specific to individuals. The filer will still be in control of their assets but a repayment plan, usually based on a three to five year repayment plan. Portions of the total debt may be discharged but that determination will be based on the debtor’s income. Chapter 13 bankruptcy also places limits on the amount and type of debts that can be involved.