Understanding the Types of Bankruptcy

Understanding the types of bankruptcy can seem difficult and confusing. Most people have heard the chapters and numbers, but have little idea what they mean. The four main types of bankruptcy are Chapter 7, Chapter 11, Chapter 12, and Chapter 13. The names are based on the chapters, or parts, of federal financial laws detailing bankruptcy.

Chapter 7 is the most common kind of bankruptcy filing and is often referred to as "personal" bankruptcy. It is generally used by individuals, but some businesses may qualify to file under Chapter 7 as well. If this type of bankruptcy filing is accepted, most debts are written off and debtors are prohibited from trying to collect on the eliminated debt.

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All property and assets are sold to pay off the debts, as much as possible, with the exception of holdings that may be exempted by your state. Check your local state laws for more information regarding this asset exemption. All non-exempt property and assets must be handed over to an appointed trustee for sale.

Chapter 7 usually takes three to six months to complete, though a particularly complicated case may take longer to resolve. This type of bankruptcy may only be filed again eight years after the completion of the initial case.

The Bankruptcy Abuse Prevention and Consumer Protection Act that was enacted in 2005 made it difficult for many individuals to qualify for Chapter 7. Consulting an attorney is advisable.

Chapter 11 is mainly for businesses undergoing restructuring and cut backs. It is a very complicated kind of bankruptcy, involving an intricate reorganization of finances and partial forgiveness of debt. The assistance of a licensed attorney who can help with understanding the types of bankruptcy and their legal complications is absolutely necessary for Chapter 11.

Chapter 12 is solely meant for family farmers, and it allows them to address debt with a schedule of repayments.

Chapter 13 is for individuals and often referred to as "reorganization" bankruptcy. Unlike Chapter 7, it allows the filing party to retain property they might otherwise lose, such as a mortgaged home.

Under Chapter 13, debt is paid off over a number of (usually 3 to 5) years under a payment plan approved by a court and supervised by a court-appointed trustee. There are a number of limitations on this type of bankruptcy and if the payment schedule is not held to, the court may force the bankrupt person into Chapter 7. Like Chapter 11, Chapter 13 requires the assistance of an attorney.

Before filing, be sure that you have done solid research or acquired the assistance of an attorney. Understanding the types of bankruptcy is important to avoid additional expenses. A bit of knowledge can save you a lot of time, trouble and money.

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