Bankruptcy is usually one of the last steps in a debt management process. Bankruptcy was previously used as a cure-all for eliminating all debt; however recent changes to the bankruptcy laws hold filers responsible for many debts that were previously erased. Understanding the basics of bankruptcy and when to use it can help you identify whether this option is best suited for your individual financial situation.
There are six different types of bankruptcy filings under the bankruptcy code. Each type is appropriate for different situations and should be used in the appropriate circumstance. The six different types of bankruptcy filings are Chapters 7, 9, 11, 12, 13 and 15. A Chapter 7 Bankruptcy filing is usually used by individuals in the most severe debt arrears. A Chapter 7 filing should be used only as a last resort if no other options are available. Under Chapter 7, a court appointed trustee collects the debtor’s assets and sells them for cash. The funds are used to repay the debtors for the monies owed to them. A Chapter 7 bankruptcy can only be filed every six years.
Chapter 9 bankruptcy filings are reserved for municipalities such as townships, school districts, cities and counties. The distressed municipality can file for this type of bankruptcy to arrange a repayment plan with their creditors. In the case of Chapter 11 and 13 bankruptcy filings, these are usually used by businesses although an individual can also file for Chapter 11. In these instances, the debt is restructured to result in a payment arrangement that is suitable for the individual or business and their creditors. Often times a payment arrangement is reached that can extend from three to five years. Both Chapter 11 and 13 are designed for borrowers who have a steady stream of income and are likely able to repay the debt owed.
Chapter 12 Bankruptcy filings are reserved for farmers and fishermen who are facing debt difficulties. It is a voluntary filing for workers who have a steady stream of income although some allowances are made for seasonal income. Assets are not seized but instead, a plan is established to pay off debt over a certain length of time. A Chapter 15 Bankruptcy differs from all the others in that it is most never used by an individual but is instead used for an international corporation with assets and creditors across multiple countries.
When dealing with traditional consumer debt, Chapter 7 and 13 bankruptcy filings are the most common. If you feel that your situation may warrant a Chapter 7 filing, you should first seek the services of a competent credit counseling agency. A professional will be able to walk you through the options you can select and help your determine whether a bankruptcy is the best option for you. A bankruptcy filing will usually disappear from your credit report after 10 years. In the case of a Chapter 13, it may be removed after seven years. Understanding the different types of bankruptcy and what is involved can help you determine whether or not this is the best option for you.