Unfortunately for Americans, personal bankruptcy filings have been on the rise. The worst economic recession in a generation is a primary cause, along with a housing crisis that has left millions of Americans owing more money on their homes than their homes are worth. Hopefully, you’ve been able to weather the storm. However, if you find yourself in over your head, what are your options regarding bankruptcy?
Two Types of Bankruptcy for Individuals or Small Businesses- Chapter 7 and Chapter 13
There are several different types of bankruptcy; all may not be applicable to your particular circumstances, but it’s useful to know about them. Individuals primarily are able to file for two types of bankruptcy: Chapter 7 and Chapter 13.
Chapter 13 bankruptcy is designed for individuals who have a steady source of income, however insufficient it may be to service the individual’s debts and other commitments. This type of bankruptcy enables the filer to maintain his or her assets; it is more of a reorganization plan, which must be approved by a bankruptcy court. Filers are able to stretch out their payments to creditors over a three- to five-year period; payments are made from a filer’s regular income, whether wages or otherwise, according to the approved plan. At the end of the designated period, any remaining debts are discharged, and the bankruptcy filing is considered complete. Chapter 13 bankruptcy can also be declared by small businesses.
Chapter 7 bankruptcy is one of the most common used by individuals, although it is also open to businesses; it is more severe than Chapter 13. Essentially a liquidation rather than a reorganization, the person or business filing must transfer all assets to a court-appointed trustee, who then sells the assets for cash and distributes the proceeds to the filer’s creditors. Certain assets may be exempt; a filer can usually keep his or her home or car, although the filer’s home can still be foreclosed on, separately from the bankruptcy process. A Chapter 7 bankruptcy process usually lasts four to six months, at the end of which most debts are extinguished.
A Chapter 11 bankruptcy is designed more for larger companies, allowing companies to remain open for business and keep most assets; like Chapter 13, this type of bankruptcy is a debt restructuring process rather than a liquidation. A trustee usually handles the bankruptcy proceedings, working out a debt repayment plan that must be approved by creditors as well as the filing company. Often, multiple repayment plans are proposed, and creditors have an opportunity to vote on the plan they like the most. The process can take years, as the filing company continues to operate and hopefully works itself into a more viable financial position. Individuals can also file for Chapter 11 bankruptcy, but, given the complexity of the process, it is rarely recommended for individual filers.
Chapter 12 bankruptcy is targeted to agricultural businesses, primarily family farmers and fishermen. This provision allows small agriculturalists to proceed with their business operations while their debts are readjusted. Like a Chapter 13 bankruptcy, a three- to five-year repayment plan is implemented, as approved by the court.
Chapter 9 bankruptcy is another special procedure, aimed toward municipalities and other taxing organizations, as well as school districts and public utilities. And Chapter 15 bankruptcies are aimed toward organizations or individuals with creditors overseas, thus involving the laws of more than one country.
Alternative to Bankruptcy
In most cases, an individual bankruptcy proceeding begins with credit counseling — working with a counselor, you may be able to find a way out of debt without filing for bankruptcy. If you have no other way out, however, your next step should be to consult with a bankruptcy lawyer, who will examine your case and suggest the best way to file. With any luck, you’ll pass through the process in one piece and will then have a fresh start at financial solvency.
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