When most people think of bankruptcy, it is usually chapter 7 and chapter 13 bankruptcies that comes to mind. However, under the United States Bankruptcy Code, there are actually six types of bankruptcies that a person or entity can file:
Chapter 7- Liquidation
Chapter 7 is the most commonly filed individual bankruptcy, as a chapter 7 lawyer Peoria IL trusts can explain. This type of bankruptcy typically offers filers a “fresh start” because the majority of debts will be eliminated. People who file for chapter 7 usually do not have much in the way of assets. Whatever assets they do have are liquidated and those funds are put towards debt. Any debt left over is discharged.
Chapter 9- Adjustment of Debts of a Municipality
Chapter 9 is used only by municipalities, such as counties, cities, and towns. It is very rarely used and when it is, the municipality must meet stringent criteria:
- Under state law, the municipality is allowed to file chapter 9;
- The municipality is unable to pay its debts;
- The municipality wants to adjust its debts; and
- The majority of the municipality’s creditors agree to the filing.
Chapter 11- Business Reorganization
When a business or corporation is struggling financially, they often choose to file for chapter 11 protection, which allows them reorganize the debt they owe. Companies must provide a reorganization plan with their filings which show how they will continue to pay creditors for debts which are necessary to operate their business, but eliminate or reduce debts which are not.
Chapter 12- Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income
If a business is a farm or fishing company, then they would file for chapter 12 instead of chapter 11. This type of bankruptcy allows for filers to reorganize and pay off creditors over a certain amount of time while enabling them to continue their business operations.
Chapter 13- Individual Reorganization
Chapter 13 is for individuals, but unlike chapter 7, this type of bankruptcy allows people to keep assets instead of liquidating them. Those who file chapter 13 must prove they have a steady source of income. Debts are reorganized in a way that allows the person to pay them off within three to five years. This bankruptcy is particularly helpful for homeowners who are facing foreclosures.
Chapter 15- Ancillary and Other Cross-Border Cases
Chapter 15 bankruptcy allows foreign corporations to file bankruptcy in the United States. It is usually a secondary proceeding, with the primary proceeding taking place in the entity’s home country.
If you would like to learn more about the different types of bankruptcy and how you may benefit, give a skilled bankruptcy lawyer a call and learn what your options are.
Thanks to our friends and contributors from Smith & Weer, P.C. for their insight into bankruptcy.